The eRupee Move Gathers Steam

Having decided to ‘bell the digital currency cat‘ a month ago, the Reserve Bank of India (RBI) appears to have now taken the next step by identifying five banks to work on a retail pilot project of rolling out the central bank digital currency (CBDC). Of course, there are those who believe that India’s success with UPI payments makes a digital currency largely redundant, but more of that in another post. 

A report published in the ET quoted unnamed sources to suggest that SBI, ICICI Bank, HDFC Bank and IDFC Bank were among the five lenders shortlisted for the project. Of course, these banks would be assisted by the National Payments Corporation (NPCI) and RBI in the process where the eRupee would be rolled out to select customer and merchant accounts. 

RBI has pushed ahead with CBDC

The RBI had published a concept note (download and read) on the CBDC a month ago and was in discussions around whether the retail CBDC should become interoperable with the current digital payments systems under the UPI or should it be governed by a new framework. For now, there is no clear date on when the digital currency could be launched. 

Of course, RBI has already rolled out a pilot on using CBDC in the wholesale markets, but its rollout for retail use requires more work, given that it potentially changes the way payments are made and accepted in the country’s financial system. The sources also claimed that more banks could get added to the pilot project in the weeks ahead. 

What’s with the sudden CBDC rush?

This report comes at a time when central banks across the world are falling over each other to issue digital currencies, with some already taking steps towards it. China was among the first to get off the blocks with its e-CNY launch in Shenzhen back in 2020 and has since expanded its use to other cities. 

While the Sveriges Riksbank of Sweden is testing out an e-Krona for commercial and retail use, even the US Federal Reserve has now come out with a note weighing the pros and cons of issuing a CBDC. The obvious argument in favor being that by providing digital access to anyone with a smartphone or card, the CBDC will extend modern payments to the masses. 

Ironically, this is the very reason that some financial experts are questioning India’s move, given that its UPI payments gateway has already made digital access to payments possible to every section of society. Additionally, India has also taken steps to address the unbanked problem through no-frills savings accounts minus the minimum-balance requirements. 

There are basic issues to be sorted out

On its part, the RBI is reportedly considering the option of anonymity when it comes to small value retail payments worth up to Rs.50,000 when done digitally. The concept note shared by the central bank had said “Reasonable anonymity for small-value transactions akin to anonymity associated with physical cash may be a desirable option for CBDC-R.”

However, the bigger challenge around which discussions are taking place is the question of making payments based on QR codes (via UPI) interoperable with the proposed digital currency. While one section believes that interoperability is a must for all modes of payment, the other believes this is unnecessary in smaller towns and cities. 

In spite of these differences of view, the RBI is clear that CBDC aims to reduce dependence on cash, which continues to form more than 80% of all retail transactions in the Indian economy.