Categories: Banking

What Is Digital Rupee, RBI launches Its First Pilot Project

The Reserve Bank of India (RBI) will commence pilot launches of the digital rupee from November 1. It has identified nine banks for participation in the pilot launch. They are the State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank, and HSBC.

Bank Maha Pack includes Live Batches, Test Series, Video Lectures & eBooks

What Is Digital Rupee:

A Central Bank Digital Currency (CBDC) or Digital Rupee is a digital form of currency notes issued by a central bank. Digital currency or rupee is an electronic form of money, that can be used in contactless transactions.

Presenting Union Budget 2022, Finance Minister Nirmala Sitharaman announced that the Reserve Bank of India (RBI) would be rolling out its digital currency soon.

CBDCs Types:

1) Retail (CBDC-R): Retail CBDC would be potentially available for use by all,

2) Wholesale (CBDC-W) is designed for restricted access to select financial institutions.

Difference between Digital Rupee and Cryptocurrency:

A cryptocurrency is a decentralised digital asset and a medium of exchange based on blockchain technology. However, it has primarily been controversial due to its decentralised nature, meaning its operation without any intermediary like banks, financial institutions, or central authorities. On the Contrary, Central Bank Digital Currency (CBDC) issued by the Reserve Bank of India (RBI) will be a legal tender in a digital form.

What Has Been Said:

On October 7, the RBI had released a concept note on Central Bank Digital Currency (CBDC) for India. The CBDC is a digital form of currency notes issued by a central bank. While most central banks across the globe are exploring the issuance of CBDC, the key motivations for its issuance are specific to each country’s unique requirements.

The central bank said the digital rupee will provide an additional option to the currently available forms of money. It is substantially not different from banknotes, but being digital it is likely to be easier, faster and cheaper. It also has all the transactional benefits of other forms of digital money, the RBI said. The central bank said its digital currency is aimed to complement, rather than replace, current forms of money and is envisaged to provide an additional payment avenue to users, not to replace the existing payment systems.

Supported by state-of-the-art payment systems that are affordable, accessible, convenient, efficient, safe, and secure, the digital rupee will further bolster India’s digital economy, make the monetary and payment systems more efficient and contribute to furthering financial inclusion, the RBI said.

Benefits of Digital Rupee:

Apart from reducing the transaction cost, having a digitised currency will make it easier for governments to access all transactions happening within the authorized networks. “It will become impossible to avoid the gaze of the government, thus subjecting every transaction to relevant laws within the country. Hence, the government will have better control over how money leaves and enters the country, which would allow them to create a space for better budgeting and economic plans for the future, and overall a much safer environment,” said Archit Gupta. Another benefit of digital currency is that they do not get torn, burnt or physically damaged. Neither can they be physically lost. “The lifeline of a digital currency will be indefinite compared to physical notes,” he added.

More Efficient:

The use case for this pilot is the settlement of secondary market transactions in government securities. The use of the digital rupee is expected to make the interbank market more efficient. Settlement in central bank money would reduce transaction costs by preempting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk, the central bank said. Going forward, other wholesale transactions and cross-border payments will be the focus of future pilots, based on the learnings from this pilot, the central bank said.