digital rupee

The Complete Guide to the Digital Rupee

digital rupee

The Reserve Bank of India (RBI) said on Monday that, beginning 1 November 2022, a pilot launch of the digital rupee for specified use cases will commence. Tuesday, according to the statement, the first digital rupee experiment began in the wholesale sector. The pilot program has been implemented by nine banks, including 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. In October of 2015, the Reserve Bank of India (RBI) proposed to the government that the scope of the paper rupee be expanded to encompass digital currency.

Earlier, Union finance minister (FM) Nirmala Sitharaman said that the Reserve Bank of India (RBI) will establish a central bank digital currency (CBDC) in 2022-23. This was the first formal declaration from the Union government regarding the much awaited launch of the digital currency. According to the FM, the implementation of CBDC will strengthen the digital economy and be based on blockchain technology.

Describe CBDC

Central Bank Digital Currency (CBDC) is a digital form of legal money issued by a central bank, according to the RBI. Simply described, it is a digital representation of the Indian Rupee, a sort of fiat currency. Therefore, it may be exchanged one-for-one for fiat currency.

According to the RBI, "CBDC is the digital form of legal money issued by a central bank." It is the same as a fiat money and can be exchanged for it in equal amounts. It differs only in its shape." Using blockchain-based wallets, the currency will be traded. It will also be exchangeable for currency issued by the government. CBDC provides an alternative to western monetary systems.

What Is the Technology of Blockchain?

A blockchain is a mechanism for recording information that is nearly impossible to alter, hack, or cheat. It is a digital ledger of transactions that is spread across the whole network of blockchain devices. The technology facilitates the storage and transaction of digital cash. It is one of the safest ways to exchange digital cash because it is impossible to manipulate.

Why is RBI launching CBDC?

CBDC is envisioned to provide users with an extra payment option, not to replace the present payment systems.

The Reserve Bank of India believes that the digital rupee system will "bolster India's digital economy, increase financial inclusion, and make the monetary and payment systems more efficient." RBI cited the following justifications for India's consideration of issuing CBDC:

  • Decreased fees associated with physical cash management
  • To advance the cause of digitization in order to create a cashless economy
  • Supporting competition, productivity, and innovation in payments
  • Examine the application of CBDC to enhance transnational commerce
  • Support financial inclusion
  • Protect the public's faith in the national currency in the face of the expansion of crypto assets.

Digital Rupee characteristics

  • CBDC is a currency issued by central banks in accordance with their monetary policy.
  • On the central bank's balance sheet, it appears as a liability.
  • It must be recognised as a means of exchange, legal tender, and a secure store of value by all citizens, businesses, and government institutions.
  • CBDC is fully convertible with commercial bank currency and cash.
  • CBDC is fungible legal money for which holders are not required to maintain a bank account.
  • It is anticipated that CBDC will reduce the price of money issuance and transactions.

How Is Digital Rupee Different Than Digital Money?

RBI explained the distinction between CBDC and digital money by stating, "A CBDC would be a liability of the Reserve Bank, and not a commercial bank, making it distinct from existing digital money available to the public."

There are two types of CBDC:

  • Retail (CBDC-R): Retail CBDC would conceivably be available to anyone
  • Wholesale (CBDC-W): Wholesale CBDC is meant for restricted access to chosen financial institutions

Digital Rupee's Benefits

In addition to cutting transaction costs, a digitized currency will make it simpler for governments to access all transactions taking place within authorized networks. It will be hard to dodge the government's watchful eye, thereby submitting every transaction to the country's applicable laws. Thus, the government will have greater control over how money departs and enters the country, allowing for improved future budgetary and economic planning, as well as an overall safer environment.

The Reserve Bank of India (RBI) has been examining the merits and downsides of a central bank digital currency for some time and is working on a strategy to introduce it in stages, the central bank announced earlier this month.