Digital Rupee: RBI is Launching Digital Currency
Reserve Bank of India is piloting digital currency in the Indian Market as an experiment.
The Reserve Bank of India will introduce a digital rupee on an experimental basis today. It will be available only in the wholesale segment for a few days. This currency will be implemented as a pilot project to review its functionality. The Reserve Bank of India on Monday announced that this digital currency will be implemented for the retail segment in a limited manner after a month.
As part of a pilot test in the wholesale segment, it will initially settle only secondary market transactions in government securities. State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank, HSBC and other 9 banks will participate in this pilot project.
The use of digital rupee (e ₹-W) is expected to make the inter-bank market more efficient. Transaction costs are expected to come down in the case of central bank settled cash. Based on the results revealed by the current pilot project, future cross-border payments and other wholesale transactions will also be tested through this pilot project.
In October, the Reserve Bank of India released a concept note on Central Bank Digital Currency (CBDC). This note discusses the risks and benefits of introducing this currency.
RBI Concept Note on Central Bank Digital Currency (CBDC) discussed in detail. Reserve Bank of India defines CBDC as legal tender (currency) in digital form. It is equivalent to sovereign paper currency. But the form is different. It can be exchanged with the currently existing currency. Allowed to accept as payment medium. It appears that CBDC is registered as a liability in the Central Bank’s balance sheet..” explained the RBI.
The RBI said that certain back-end technology upgrades will be required in the design of this pilot project. Secondary market transactions will take place in government securities today. So far whenever government securities are sold in the secondary market the transaction is completed on settlement T+1 (buy plus one day) basis.
At present 9 banks have opened accounts with RBI for transaction in the form of CBDC. Money is transferred instantly through these.
For example, suppose you want to buy 10-year government securities from another bank for Rs 100 crores. It will be debited to the digital currency account with RBI in respect of the buyer bank when the transaction is done. The seller’s account will be credited on the same day. The securities will be transferred from RBI to the buyer..” explained a banker.
The CBDC concept was announced by Union Finance Minister Nirmala Sitharaman in the Budget 2022-23. The Reserve Bank is piloting this CBDC due to the threat posed by cryptocurrencies to financial stability.