Central Bank Digital Currency - The ‘digital rupee’ in India

Jasdeep Kaur (jasdeep1609@gmail.com) is an Assistant Professor at SGTB Khalsa College, Delhi University.
6 January 2023

Central Bank Digital Currency (CBDC) is a digital counterpart of government-backed fiat money. This kind of digital currency is connected to the nation's currency and issued by its central bank. The same would be the case with the ‘digital rupee’ in India as it will be backed by the central bank of India, i.e. RBI. The development of CBDCs is underway in more than 100 nations across the world, and it is in various phases. Some countries have already released their digital currencies, while some have abandoned or stopped working on their initiatives. Despite being strongly inspired by bitcoins, the idea of CBDCs differs from decentralised virtual currencies and crypto assets, which are not issued by the government and do not have the status of "legal tender." With the rising demand for cryptocurrencies, there is a rise in the government's concerns about the risks associated with the same and its tendency to facilitate money laundering and other forms of criminal financing, and thus the concept of CBDC is gaining momentum. Even though the RBI supports the growth of virtual and online currencies, it does not support ones like bitcoin because it is impossible to monitor their end-use. It is preferred to introduce CBDC in order to track end-to-end virtual currency usage. The article sheds light on what digital currency is, how it differs from cryptocurrencies, why it has had such a surge in popularity recently, as well as the problems and risks that come with using it.


Traditional banking and financial systems are transforming across the globe owing to the effects of the Covid-19 epidemic, shifting trading dynamics, and pervasive technological advancements. Post demonetisation in 2016 and the launch of digital India initiative, the government in India has been stressing on the use of digital space and digital money. The current Union Budget Finance Minister, Nirmala Sitharaman announced the introduction of Central Bank Digital Currency which is popularly known as “CBDC”. The Reserve Bank of India (RBI) is seriously considering introducing its own Central Bank Digital Currency (CBDC) this fiscal year, which will first be restricted to usage by wholesale businesses only. Given this, the RBI submitted a proposal to the central government in October 2021 to alter the RBI Act, 1934 to expand the definition of "banknote" to encompass currency in digital form. The central bank stated in its annual report (published in May 2022) that it was considering the benefits and pitfalls of introducing CBDC in India while moving gradually through the phases of proof-of-concept, pilots, and launch. "The Reserve Bank is engaged in introducing a central bank digital currency (CBDC) in India. The design of CBDC needs to be in conformity with the stated objectives of monetary policy, financial stability and efficient operations of currency and payment systems,” the RBI said in its report. With the declaration of CBDC in the Union Budget and subsequent enactment of the Finance Bill containing the necessary amendments to the RBI Act, 1934 the necessary legal foundation for CBDC's establishment has been laid and therefore the RBI is now responsible for ensuring that the digital currency that will be introduced achieves the goals that have been set for its introduction.

What is a central bank digital currency or CBDC?

According to RBI, "A CBDC is a legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different". In other words, digital currency is a digitised or virtual version of domestic currency that is equal to physical cash. CBDC, though a virtual or digital currency, differs from private cryptocurrencies in that it satisfies a key requirement of the definition of a currency being backed and issued by a central bank. CBDC is the same as money issued by a central bank, except it doesn't come in paper form (or polymer). It is a sovereign currency in electronic form and would appear as a liability (currency in circulation) on the balance sheet of the central bank of India.                     

Hence, Central bank digital currency is ….

  • the legal tender
  • issued and governed by the central bank
  • is in digital form
  • same as a fiat currency
  • will be based on blockchain technology

 Although CBDC is a virtual or digital currency, it cannot be compared to the private virtual currencies or cryptocurrencies that have exploded over the past ten years. It is also essential to understand the difference between CBDC and cryptocurrencies. Not all digital currencies are cryptocurrencies, but all cryptocurrencies are digital currencies. Digital currency may not be encrypted, but cryptocurrency operates in an encrypted format through blockchain technology. Since there is no issuer, private virtual currencies do not represent any person's debt or liabilities.

What are the drivers of CBDC?

The majority of central banks throughout the world are experimenting with digital currency to combat the current wave of virtual currencies or cryptocurrencies. Private or decentralised money is not something that the central bank can regulate, and it also poses a challenge to the sovereignty of their national currency as the public is responsible for both the creation and upkeep of these virtual currencies. The central bank can prevent these misdeeds by regulating the digital currency. That is why most central banks, including those in Sweden, China, and the EU, are developing their own CBDC.
Another issue with cryptocurrencies is that their value is purely based on speculations because they are not linked to any assets or currencies (demand and supply). As a result, the value of cryptocurrencies like bitcoin has fluctuated greatly. As CBDCs are issued by central banks, their demand and supply can be regulated and they can be used as a monitoring tool. CBDC may be able to provide better resilience, higher safety, greater availability, and lower prices than private forms of digital money if they are wisely structured.
A CBDC may possibly be a crucial step toward financial inclusion. Although the availability of payment services has increased recently, only some have access to them. People with low incomes and those who live in rural areas still need help accepting digital payments. Payments across borders, especially for small-value transfers like remittances, can be difficult and expensive for domestic retail payment systems. CBDCs can aid in extending the public's access to public funds. The adoption of digital payments can be accelerated by central banks with the support of CBDCs, especially when the market and profit opportunities are insufficient to spur private sector innovation and handle the associated risks.
Digital forms' ease of use and security is another benefit favouring CBDC. It is always more convenient and secure to carry digital money than carrying actual cash. It combines the conventional approach with the innovative approach. CBDC can gradually enact a cultural shift in favour of virtual money by reducing the costs associated with currency management. CBDC is designed to combine the security and convenience of digital cash with the reserve-backed money circulation of the traditional banking system.

Why has CBDC suddenly gained popularity in India?

The Reserve Bank of India (RBI) has been studying the possibility of introducing a central bank digital currency (CBDC) since at least 2013. It is unclear what the benefits would be to the RBI in issuing a CBDC. Still, it is being argued that it would allow for better control and oversight of the domestic money supply and financial stability. Several nations are developing CBDCs, and a few have even implemented them. As of August 2022, 11 countries(The Bahamas, Nigeria, Jamaica and eight countries of the Eastern Caribbean Union ) have already launched their digital currencies. Many including China are still testing and developing their CBDCs. The drivers for CBDC in India are many and varied. But, at its core, the need for CBDC stems from the desire for a more efficient and inclusive monetary system. The current monetary system in India is based on paper currency, which is subject to wear and tear, as well as counterfeiting. This means that there are significant costs associated with its production and distribution. In addition, paper currency is also inefficient in terms of storage and transport. This will also ensure that India remains at the forefront of innovation in the global financial system and does not fall behind other countries in terms of implementing new technologies.

In addition, CBDC would also allow for greater inclusion by expanding access of financial services to those who are currently excluded from the formal banking system. At present, there are around 1.2 billion people in India who do not have access to formal banking services. This means they miss out on opportunities to save and build financial resilience. A CBDC could address this by providing a safe and convenient way for people to store and use money without going through a bank.

CBDC, or the digital rupee, can be used in many real-world applications, such as programmable payments for subsidies and quicker lending and payments by financial institutions. A practical transition to a cashless economy may occur soon, and this might strengthen the government's emphasis on cashless transactions. Cross-border remittances may gain from increased use of CBDC as an environment for interoperability may be established, allowing for faster real-time transmission.

Finally, CBDC could help to reduce the cost of printing and circulating paper currency. CBDC would mitigate these costs by being digital and therefore more secure and less expensive to produce. In addition, banks charge high fees for certain services, such as international money transfers; with CBDCs, these fees could be reduced or may not even be required, as there would be no need for banks to process the transactions. CBDCs might also make it possible for payment systems to be more quick, easy and global. It is possible for an Indian importer to directly pay a foreign exporter in digital dollars without using a middleman; the transaction would be final.

How CBDC differs from other digital mechanisms, and why is it considered better?

There are numerous ways and platforms available for digital payments. However, a CBDC or Central Bank Digital Currency has some advantages over other alternatives, and these are:

1. As the government's central bank backs CBDC, it is regarded as being more stable than cryptocurrencies, which may be very volatile.

2. Large transactions can be made using a CBDC without worrying about the cap imposed by cryptocurrency.

3. A CBDC is faster and more efficient than other digital payment methods, such as blockchain-based payments.

4. As it would be harder to launder money via a CBDC than other digital payment systems, a CBDC can assist in reducing crime.

Digital currency will be different from Unified Payments Interface (UPI), which is a system that powers multiple bank accounts into a single mobile application. The underlying currency or cash is used to transmit funds through payment channels like UPI, so UPI payments are currently made with the digital equivalent of physical cash notes. This means that each rupee moved through UPI is backed by actual money, whereas in the case of CBDC, the underlying payment method will be the Digital Rupee, and there won't be a need to back it by real money because it will be legal tender in and of itself.

The digital rupee will be run by RBI rather by bank intermediates, as is the case with UPI, where each bank has a different UPI handler, which is the other point of distinction. Furthermore, Digital Rupee transactions will be instantly settled. Currently, UPI payments rely on the settlement of the transacting banks with the RBI; however, since Digital Rupee will be transacting straight from the RBI, it will be settled immediately.

What are the risks of a CBDC?

The Indian government is in the process of issuing CBDC but there are risks associated with such a move. For example, if a CBDC is poorly designed, it could lead to increased cyber security risks or be subject to fraud and other types of crime. One of the key risks is the potential for CBDC to be used for money laundering and terrorist financing. Another risk is that CBDC could undermine the existing financial system, which is already struggling to cope with high levels of non-performing loans. There is also the possibility that CBDC could lead to inflation if it is not managed properly.

Banks in India have also raised their disintermediation concerns over RBI’s digital currency plans. Banks worry about the potential long-term effects if the central bank takes on the role of keeping and dispersing digital currency, eliminating banks as an intermediary between customers and the RBI. This could lead to a decrease in deposits, and if banks start to lose deposits over time, it will limit their ability to extend credit. Additionally, when banks lose sizable amounts of low-cost transaction deposits, their interest margin may be put under pressure, raising the cost of loan. RBI has taken all these concerns into perspective and has decided to move slowly and steadily, wherein the initial focus area is wholesale CBDC. Wholesale CBDCs means it will be used to facilitate payment between RBI and commercial banks and entities that hold accounts with central banks. Due to its potential to make current wholesale financial systems more efficient, accessible, and secure, the wholesale CBDC is thought to be the most well-liked concept among central banks.

Privacy concerns are yet another issue. The majority of CBDCs will be created such that the central banks can track the spending, unlike completely anonymous cash. The increased risk to user privacy must be addressed as well, considering that the central bank would have access to a lot of information about user transactions. This has significant ramifications since digital currency users will not be entitled to the same amount of privacy and anonymity as those who trade with cash.


As the world progresses, technology intervention is leading to the digitisation of services as well as ways of working across industries. We are now at the cusp of entering a new phase of banking, with the digitisation of currency being the first step in this evolution as more innovative payment methods are being developed. Central banks have now started to develop their own digital currencies, also called central bank digital currencies or CBDCs. By the beginning of 2023, India's official digital currency, which would resemble any of the present private company-run electronic wallets, is most likely to be introduced. The CBDC will be a digital currency backed by the government. The digital rupee is a Central Bank Digital Currency to be issued by the RBI and will be backed by the reserves held by the central bank. The digital rupee will be similar to other online or virtual currencies, but it will have some unique features. It will be designed to reduce the cost of printing and circulating currency notes and to promote financial inclusion. The CBDC can benefit consumers over conventional payment methods in terms of liquidity, scalability, adoption, ease of transactions with anonymity, and quicker settlement. With the assistance of the government-provided infrastructure, the adoption of CBDC will grow, enhance and make it simpler for consumers to use. Similar to how UPI made digital cash more user-friendly, this advancement will increase people's access to digital currencies.

Jasdeep Kaur (jasdeep1609@gmail.com) is an Assistant Professor at SGTB Khalsa College, Delhi University.
6 January 2023