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RBI launches its own Digital Currency in India

RBI launches its own Digital Currency in India

RBI launches its own Digital Currency in India


The Reserve Bank of India (RBI) announced the launch of the pilot project of the Retail leg of its Digital currency in India from 1 Dec 2022,


It is an official release declared by RBI on Tuesday, 29, 2022. The currency would be distributed as a Digital Token, and the Digital Token will represent the legal tender.


Initially, in the pilot project, the digital currency will be distributed in the selected locations and the close user group (CUG) comprising participating customers and merchants.


The distribution of digital currency is done through the selected bank only, and the user will Transact through their digital wallet only.


Digital Currency Transactions can be done among Person to Person (P2P) and Person to Merchant (P2M). You can make payments to merchants using QR codes displayed at their locations


During the retail pilot project, the entire process of creating, distributing, and retailing digital rupees will be tested in real-time. Further upcoming updates and new features of the e₹-R token will be tested in future pilot projects based on the current learnings.


On November 1, 2022, RBI launched the Central Bank Digital Currency of India, the pilot project of India’s digital currency, which is a significant step in developing the next-generation financial system of India.


It is not just a big deal for India but also for other developed economies of the world such as China, France, the USA, and Switzerland, and therefore all of them are striving hard to find a way to develop their own Central Bank Digital Currency.


The launch of RBI’s Digital currency in India in 2022 is currently primarily for the settlement of secondary market transactions of government securities only but the retail version of the Digital Rupee is also expected to be rolled out soon.  


Currently, only select banks can use e-currency in India for select transactions. The nine banks that can participate in the pilot project of wholesale digital currency are Union Bank of India, Bank of Baroda, State Bank of India, ICICI Bank, HDFC Bank, IDFC, Kotak Mahindra Bank, Yes Bank, and HSBC. But here, the main question is What is Digital Rupee?




What is Digital Rupee/Currency?

The new digital currency launched by RBI in 2022, or Digital Rupee is the digital form of currency notes issued by the central bank. The money which you have in your bank account is a physical currency, and to keep the economy going, RBI prints money in physical form, but now RBI’s digital currency in India will be equivalent to current physical money, which is called Central Bank Digital Currency or E-Rupee.

In simple words, RBI’s digital currency is the same as cash but in a virtual form.

Digital Rupee will be accepted as legal tender by all citizens and government agencies and will have one-to-one exchangeable value at par with the physical currency of the same amount. It will save the operational costs of printing cash and the hassles related to carrying out payments related to cash.




Types of Digital Currency in India

In the Central Bank Digital Currency of India (CBDC), there are two types of CBDC, which are:

1). Wholesale (CBDC-W): It is designed for restricted access to select financial institutions.

2). Retail (CBDC-R): Retail CBDC would be potentially available for use by all from private sectors, non-financial consumers to businesses.


Retail CBDC is the digital version of physical cash which will be primarily introduced for retail transactions and as the retail digital rupees are a direct liability of the Central Bank of India, they are expected to provide access to a secure platform of virtual money for payments and settlement.

On the other hand, CBDC wholesale is introduced to settle interbank and related wholesale transactions.



Key difference between Digital Currency and Cryptocurrency

Government Backing - The RBI digital currency will be different from Bitcoin, Ethereum, and other cryptocurrencies as it is issued and backed by the government and, therefore, will be a legal tender in a digital form.

On the other hand, cryptocurrency is a decentralized digital asset and a medium of exchange based on blockchain technology. It has primarily been controversial due to its decentralized nature because of a lack of transparency, and its operations cannot be regulated by the RBI.

In simple terms, cryptocurrencies are private money of unknown individuals, whereas RBI Digital Currency is a government-backed legal tender that is touted as a safer form of money.




Digital Rupee as an alternative to Cryptocurrency

In the past, the RBI expressed concern about Bitcoin, Ethereum, and other private cryptocurrencies being used to launder money, finance terror, and evade taxes.

The advent of Digital currency in India will provide the public with safer virtual currency as an alternative to cryptocurrency, providing them with appropriate benefits without the risk of investing in volatile private digital assets such as cryptocurrencies.

The introduction of its own Digital Rupee has been viewed as a means of bridging the gap between the risks and benefits of digital currency.




Why do we need Digital Currency in India?


1). Reduced transaction costs: The advent of digital currency in India will result in lower transaction costs as the customers can now pay directly to the sellers saving transactions and enabling real-time account settlements rather than waiting for a day or so.

2). Assist in creating a safer financial environment: With digital currency coming into play an increase in online transactions will help the government to have better control over how money leaves and enters the country, allowing them to devise a better budget and economic plan in the future.

3). Physical Cash Management: According to RBI, the cost associated with cash management has been on the rise year by year. The cumulative cost of cash printing from April 1, 2021, to March 31, 2022, was Rs.4,984.80 in comparison to Rs.4,012.10 crore from April 1, 2020, to March 31, 2021.

Therefore, with the rolling out of e-currency in India, operational costs such as printing, transportation, and storage will come down and will save the public from the wear and tear of physical notes.


4). Innovate cross-border payments: RBI’s Digital currency would result in boosting the innovation process of cross-border payments by making the transaction process across countries smooth and instant by mitigating prominent challenges resting to time zone, legal requirements, and exchange rates.


5). Financial Inclusion: This step by RBI will provide a major thrust to the financial inclusion process by providing financial services to those without bank accounts and Internet connection as having a bank account and internet is not mandatory to make transactions with digital currency.

For example, Sand Dollars were introduced in the Bahamas by their government to promote financial inclusion and facilitate payment as its population was widely spread across 30 islands.                          




Features of Central Bank Digital Currency

1). RBI Digital currencies will be issued in accordance with their monetary policies and they will appear on the liabilities side of the balance sheet of the Central Bank.


2). It will be used as legal tender and accepted as a mode of payment.


3). CBDC in contrast to digital money which is currently in use now would be a liability to the Central Bank and not Commercial banks.


4). Digital Currency would be the alternative to physical money and could be converted into commercial bank cash.


5). CBDC in India provides the public with another safer fiat digital currency option to carry out various transaction needs.




Risk to Financial Stability

Although the newly rolled out Central Bank Digital Currency in India comes out with many positive steps in the right direction, still it could pose a threat to the financial stability of the country if not introduced carefully.


Interest-bearing CBCD- The risk with the issuance of CBCD will depend on whether RBI offers interest on their accounts with them. If RBI offers good interest rates on, then it becomes an incentive for people to switch to CBCDs for their deposits.


However, in such a scenario it could get difficult for banks to raise funds and they will have to offer higher interest rates resulting in an increased cost of funding for the banks and subsequently, banks will be forced to pass on the burden onto the borrowers. At the same time, it could make the banks more reliant on RBI for funds.


Non-Interest-bearing CBCDs- In the case of non-interest-bearing CBDC accounts, then it would not be much of an incentive for the depositors to switch to the RBI for their deposits.


Therefore, it becomes important to introduce such a step with adequate caution and safeguard the potential risks associated with it to ensure financial stability.




The new currency launched by RBI 2022 will be a game-changing step by RBI in the right direction if carried out with a balanced approach. The future of globalization is looking to be dependent on digital currencies with more than 50 countries striving towards coming up with their own CBDCs and the current international payment system SWIFT being a costly affair, the introduction of the Digital Rupee is definitely looking to be a step in the right direction by the RBI.





Que 1. What is the difference between digital money and the digital Rupee?

Ans. Digital Rupee or Central Bank Digital Currency(CBDC) is the digital form of our physical currency, whereas Digital money is the physical cash that is stored in our devices in digital form.

In other words, when our money which is stored in our banks and digital wallets, is the same physical money that is circulated digitally online, whereas the digital Rupee will be managed directly by RBI and will be another form of our physical currency.


Que 2. How to buy digital currency in india?

Ans. The launch of digital currency is done in two pilot phases by RBI: In the first phase, the digital rupee can be used only for transactions by nine select banks in government bonds in the secondary markets only.

In the second phase, the digital currency will be launched in a pilot phase for retailers.


Que 3. What will be the advantages of Digital currency in India?

Ans. There are multiple advantages of digital currency to both RBI and the common people:

  • Reduction in operating costs involved in the physical management of the cash.
  • Promotes financial inclusion as there will be no requirement of bank accounts and Internet.
  • Promotes cashless transactions
  • Provides the public with an alternate mode of transaction.
  • Promotes innovation in cross-border payments.


Que 4. What will the impact of the digital rupee on physical cash?

Ans. After demonetisation and Covid-19, there has been a surge in the usage of digital payments, and with the advent of the Digital Rupee, there will be a further increase in the digital use of money.

On the other hand, with the advent of the digital rupee, the reliance on cash will decrease, which will result in the curbing of black money as it will facilitate the government to monitor monetary transactions.

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