RBI announces pilot launch of retail digital rupee on Dec 1

The Reserve Bank of India (RBI) has announced the launch of the first pilot for retail digital Rupee (e₹-R) on December 1, 2022. The pilot will cover select locations in a closed user group, comprising participating customers and merchants. The aim of the pilot is to test the robustness of the entire process of digital rupee creation, distribution and retail usage in real-time.

The RBI has roped in eight banks for phase-wise participation in this pilot. The first phase will begin with four banks -- State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank in four cities across the country. Four more banks -- Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank will join this pilot subsequently.

The pilot will initially cover four cities, viz., Mumbai, New Delhi, Bengaluru and Bhubaneswar and later it’ll be extending to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna and Shimla. The RBI said the scope of the pilot may be expanded gradually to include more banks, users and locations as needed.

According to the central bank, the e₹-R would be in the form of a 'digital token' that represents legal tender. It will be issued in the same denominations that paper currency and coins are currently issued. It will be distributed through banks.

"Users will be able to transact with e₹-R through a digital wallet offered by the participating banks and stored on mobile phones or devices. Transactions can be both person-to-person (P2P) and person-to-merchant (P2M). Payments to merchants can be made using QR codes displayed at merchant locations," said the central bank.

The RBI says like physical cash, e₹-R will offer features like trust, safety and settlement finality. As in the case of cash, it will not earn any interest but can be converted to other forms of money, like deposits with banks. “Different features and applications of the e₹-R token and architecture will be tested in future pilots, based on the learnings from this pilot.”

The use of e₹-W is expected to make the interbank market more efficient. Settlement in central bank money is also expected to reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk. The RBI has said going forward, other wholesale transactions and cross-border payments will be the focus of future pilots, based on the learnings from this pilot.

Recent innovations in technology-based payment solutions have led central banks around the globe to explore the potential benefits and risks of issuing a CBDC. The RBI has chosen a phased implementation strategy for this, going step by step through various stages of pilots followed by the final launch, while also examining use cases for the issuance of its own CBDC (Digital Rupee (e₹)), with minimal or no disruption to the financial system.

Reserve Bank broadly defines CBDC as the legal tender issued by a central bank in a digital form. It is similar to paper currency but takes a different form, and is exchangeable at par with the existing currency. It will also be accepted as a medium of payment, legal tender and a safe store of value. CBDCs will appear as a liability on a central bank’s balance sheet.