India’s Central Bank Plans to Launch Digital Rupee CBDC

The Reserve Bank of India (RBI) logo is pictured outside its head office in Mumbai November 2, 2010.

The Reserve Bank of India (RBI) aims to raise awareness of CBDCs, which are being developed by a number of central banks around the world, and to clearly define the goals and choices, as well as the potential positive and negative elements of the introduction of the digital rupee in India. The document summarizes the key motivations for issuing an Indian CBDC, emphasizing trust, security, liquidity, and finality and integrity of settlements as key components of a sovereign digital currency.

The main motivator for the release of CBDC in India is the reduction of operating costs associated with the management of physical cash in the country. The RBI also touts improved financial accessibility in addition to an increasingly sustainable, efficient and innovative payment system. The improvement of cross-border payments and settlements is also highlighted by the promise of an autonomous function for CBDC, which would be useful in remote locations and in areas without stable electricity supply or access to a mobile network.

The RBI has been keeping public blockchains and cryptocurrencies at arm’s length for a long time, while the document sets out its constant opinion that cryptocurrencies pose a significant risk to Indian consumers due to market volatility.

“These digital assets undermine India’s financial and macroeconomic stability due to their negative effects on the financial sector.”

The RBI also highlighted its concern that the continued proliferation of cryptocurrencies will reduce its ability to regulate monetary policy and the monetary system, which the central bank considers a threat to financial stability in India. The CBDC digital rupee is touted as having the same benefits as public cryptocurrencies, while at the same time “providing consumer protection” while avoiding what he called “damaging social and economic consequences.”

The note goes on to outline the differences between retail and wholesale CBDC, with the former serving the public sector, while the latter would restrict access to financial institutions. The RBI hinted that it might be a good idea to introduce both forms to the Indian market. The Indian Central Bank also touched upon the possibility of direct and indirect issuance and management. The direct issue will result in the RBI being responsible for managing the entire system, while the indirect model will involve the use of intermediaries such as banks and other payment service providers.

The RBI also noted that a token-based CBDC would be preferable for retail use, given its similarity in use to physical cash. An account-based CBDC release will be considered for wholesale users. The document also examines the potential infrastructure underlying the digital rupee, highlighting conventional databases with centralized management or distributed ledger technology (blockchain) as two options.

The note also touches on the role of physical currency in ensuring anonymity, universality and finality. Given that digital transactions will leave a mark, the degree of anonymity is still being assessed, while the RBI suggested that reasonable anonymity for low-value transactions such as physical cash may be a “desirable option” for a retail CBDC.

The current development of digital rupee will likely require further stakeholder engagement and iterative development to create a CBDC that is suitable for a wide range of use cases. The Indian Central Bank also stressed its intention for CBDC to complement current forms of money and provide users with additional digital payment methods.