RBI’s digital rupee needn’t languish: Here’s how it can succeed

At present, 134 countries and currency unions, representing 98% of global GDP, are exploring central bank digital currencies (CBDCs). India has been at the forefront. The Reserve Bank of India (RBI) launched a CBDC pilot project for a ‘digital rupee.’ 

As part of its test run, it launched two kinds of CBDC in late 2022: a CBDC-W (wholesale) for settlement of secondary market transactions and a CBDC-R (retail) to be used as a digital version of fiat money. This is a sovereign currency. 

While money transferred through digital platforms such as UPI is a liability of commercial banks, the digital rupee is a direct liability of RBI, which has been rolling it out in phases. 

Additional functionalities and features, such as offline operability, interoperability with digital payment solutions (like UPI), and inclusion of non-bank payment operators have also been introduced recently.

Also read: E-rupee: Maximize its appeal

Benefits of CBDC: RBI’s motives include financial inclusion, a boost for digital payments systems and efficiency in cross-border transfers. CBDCs allow payments outside the commercial banking sector and enhance resilience in payment systems. 

On RBI’s Financial Inclusion Index, India had a score of 64.2 in March 2024, up from 56.4 two years earlier. As the digital rupee offers India’s unbanked population a safe, easy and bank-less digital payments solution, this score is expected to rise. 

Yet, while a CBDC has been positively correlated with financial inclusion, a digital divide and income inequality may continue to be pain points.

As a CBDC is also a step towards cost-effective and transparent cross-border payments, it could be particularly helpful for India, which is the world’s largest recipient of remittances ($120 billion in 2023 by World Bank data). 

India can leverage its digital rupee to enable payments for international trade, investments and remittances through global CBDC networks. At least 18 such link-up projects are in the works, Project Euro, Project Agora and Project Bridge among them, aimed at creating common infrastructure and promoting CBDC interoperability.

India’s government has rightly held back from engaging in such projects so far, until a global regulatory framework is in place. At the G20 summit held last year, G20 leaders, led by India, endorsed the International Monetary Fund and the Financial Stability Board recommendations of a coordinated international regulatory framework.

CBDCs can also promote competition in the digital payments ecosystem, boosting innovation. Additionally, the inclusion of non-banking financial institutions encourages the development of novel fintech products that meet unmet user needs.

Challenges for effective CBDC implementation: Consumer adoption of India’s retail CBDC remains low, even though there was a slight uptake with the circulation of digital rupee recorded at ₹234 crore at the end of 2023-24. Transactions only picked up after RBI introduced interoperability with the UPI system. 

Also read: RBI’s digital rupee must leap over many hurdles for wider adoption

But still, the volume of e-rupee transactions remains significantly lower than UPI, debit and credit card transactions in the country, which stood at ₹149.5 trillion in 2022. The principal reason for the digital rupee’s slow uptake is the evident public satisfaction with our extant online payment system, UPI, which is performing well. 

The retail CBDC has failed to provide any significant value addition that could motivate retail users to switch over from the UPI ecosystem, to which most users are habituated.

A similar trend can be seen across the globe for CBDCs. In 2020, the Sand Dollar was introduced by the Bahamas as the world’s first fully-functional CBDC. However, its adoption rate has remained low, with circulation only reaching 0.19% of the total currency by September 2023. 

The reasons for this include the low priority given to helping people adapt to it and a general lack of trust in public institutions, apart from privacy concerns and scepticism over the reliability and authenticity of the Sand Dollar.

In China, similar problems arose as in India. China’s CBDC, e-CNY, has only seen limited adoption. Users were unwilling to switch from existing online payment solutions that are offered by private platforms such as Alipay and WeChat, which enjoy user habituation. 

The digital yuan achieved 1.8 trillion yuan (or $249.3 billion) worth of transactions in 2023, but only accounted for 0.16% of China’s total money supply. What little momentum China’s e-CNY gained was largely due to Beijing’s promotions, which included lottery wins and ‘red packages’ as new year’s gifts for users.

Way forward: The digital rupee can put India at the global forefront of digital-payments innovation. However, RBI needs to address privacy and security risks associated with it in order to ensure large-scale user adoption. Uniform regulatory standards are required for security, privacy, anonymity and grievance redressal. 

Also read: Digital Rupee vs UPI: 7 key differences between RBI’s e-rupee and UPI explained

CBDCs also require strong cyber-security practices and protocols. Also, given the success of UPI in India, RBI would have to promote interoperability and increased functionality if people are to start using its e-rupee. Without any added incentive for users, it is likely that its adoption rate will remain low. 

Importantly, for India to leverage a significant CBDC benefit, of letting users make low-cost and quick cross-border payments and remittances, the country would need international cooperation, for which we would need to join global CBDC projects.