What is E Rupee? Exploring India’s Digital Currency

Last updated on October 9th, 2023 at 01:03 pm

Digital Currency is introduced in India from November 1, 2022. But What is Central Bank Digital Currency (CBDC) or E Rupee?

E Rupee is a digital form of existing physical sovereign currency issued by Central Bank. This is payable like a legal tender and exchangeable with the Fiat money.

Pilot Project in India

RBI launched digital E Rupee on  December 1, 2022 in four cites as a pilot project, The cities are New Delhi, Mumbai, Bhubaneswar and Bangalore.

Initially authorisation is given to Four Commercial Banks for issuing of E Rupee, namely State Bank of India, IDFC First Bank, ICICI Bank, Yes Bank in these region.

This will include other banks and other parts of country in a phased manner. RBI is planning to complete project by the end of year 2023.

Similar to the paper currency CBDC  is issued  and managed by the central bank.

As per RBI, Digital Rupee is secured with blockchain Technology i.e., CBDC is a Cryptocurrency issued by Central Bank.

The currency in CBDC form is same as physical currency so it is considered as the currency in  circulation. 

Need for E- Rupee

Many Central Banks around the world are  considering to  implement Digital Currency  as they are more secured and easily accessible for public and also reduces operating cost spent on physical cash management.

RBI on its publication  believes that CBDC can help in arriving economic way of isssue and managing cash movement and better settlement system.

RBI have been encouraging alternate banking channel  like Mobile Banking, Aadhaar Pay, BBPS and Digital transactions for more than a decade. 

With the introduction of UPI and the subsequent pandemic helped the government as people switched to the digital payments in a rather short time.

We have seen the transition of retail segment from cash transaction to digital transaction In the past couple of year.

Thus RBI is also considering other global models of digital transaction to encourage cashless economy in the country.

Purpose of Digital Currency

Introduction of Digital Rupee will help Central Bank via creating trust, liquid,  safe settlement system for the public. 

It also reduces the operating cost of physical cash management done by RBI and   it’s subsidiaries like banks and financial Institutions.

Introduction of E Rupee will help public, As they are more secured and easy to access  if widely accepted. 

Digital currency also helps the government by providing better system for government scheme DBD,  Financial Inclusion and payment of subsidy to beneficiary.

Hence CBDC  is an economical  option for Government and also reduces the transaction time for public.

 Types of Digital Currency

There are two types of Digital Currency

1.  General purpose or Retail currency (CBDC-R)

2. Wholesale digital currency (CBDC- W)

1. General purpose Digital Currency (CBDC-R)

The Currency issued to public and small business or called General purpose Digital Currency. This is adds to the paper currency present in the economy.

 2.Wholesale Digital Currency ( CBDC-W)

This is available only to selected financial institution. The transactions are done at wholesale market like transaction between Banks,   Foreign Remittance etc.

 Forms of Digital Currency

             Digital Currency is issued in two forms.

 1.Token based currency–  It is used in Retail Segment, Here instrument like banknotes, bonds  are considered token.   Whoever Holds the token has the ownership of the token.

2.Account Based currency–  This is used in Wholesale market transaction. 

In this  inter mediators like bank and Financial Institutions holding the responsibility of deciding the owner of the digital currency with proper KYC validated Account.

E Rupee is going to be a hybrid model with both Token based and Account based currency is available.

Usage of E Rupee

E-Rupee provided by RBI is like cash in your physical wallet, you can use it as a physical cash in all daily transactions. Hence it is not going to earn you any interest like deposit with banks.

RBI also considering to create an Anonymity for low value transaction  like available in the physical  cash transaction to make it comfortable for public.

But it has to be seen how RBI achieves this as the wallet is more likely to be  KYC compliant.

Central Bank Digital Currency in global

Many countries around the world are doing the research for implementation of digital currencies and It’s effect on Economy.

Some of the countries  introduced digital currency are  Bahama, Canada, China, Sweden and Uruguay.

All these countries  are all on the initial stages of implementation to take them as a study sample.

All of them are having common theme of digital currency with non interest  providing.

How cross border transactions will work using digital currency is to be seen as there is need for the mutual  agreement between parties on usage of particular Digital Currency.

The impact of CBDC on Economy 

CBDC if adopted can create a more transparent and Secure transaction at low cost model. This will also reduce the amount spending on printing of physical currency.

But if people move from banking to digital currency the deposits with banks will shrink in the bank, which in turn reduce the credit available with the bank. 

This will reduce the loan providing capacity of the banks.

  For a developing country like India this will affect a growth in  both macro and micro level of the economy.

The move to introduce CBDC  is not really going to help in Anti Money Laundering As RBI is planning to implement Hybrid Model in which there is going to be a physical currency present in the market simultaneously.

 Pros of CBDC

This is a move towards a  cashless economy in a country

Since  CBDC is implemented with block chain Technology,  It is more secure and saves time similar to the Cryptocurrency transaction .

 Cons of CBDC 

Financial stability of the country could be affected as the most of the people in India uses cash for retail transaction in retail market.

It will affect natural financial structure of the country as the central bank is going to have a direct  ledger for the cash available with public.

The intermediates like banks might lose their value in time if they fail to adapt.

This will also Reduce the cash available with banks if people shift their money from bank deposits to CBDC, further this will result in restricted lending in bank.

 Conclusion

In summary with the digital market being surging for the past couple of years we are not sure how digital currency is going to help the economy.

With UPI already being dominant mode for transaction for public in retail as well as wholesale market.

Turning people to use the E Rupee is going to be an hard task for the RBI and Government.

Without any reasonable benefit from adopting Digital Currency, Digital Currency in India is not going to have a major impact in the coming days.