India Shares Details of Digital Rupee CBDC Plans – Ledger Insights

In February, India’s finance minister announced plans to issue a central bank digital currency (CBDC) by March 2023. Today, the Reserve Bank of India published a concept paper outlining its motivations and current approach to a digital rupee.

The central bank plans both a wholesale (interbank) CBDC to settle securities transactions and a general (retail) CBDC for the public. For now, it intends for the wholesale CBDC to be account-based, while the retail CBDC will be token-based.

India’s digital rupee motivations

Although there are several motivations for issuing a digital rupee, the main objective is to reduce the cost of physical cash handling. During the last financial year, the cost of printing and security of issuing cash amounted to almost 5 billion rupees ($603 million) and was almost a fifth higher than the previous year.

The second goal of a CBDC is to support digitization, followed by encouraging competition and innovation in payments.

Like many other countries, India is keen to improve cross-border payments. The country is the largest recipient of inward remittances, which is expected to reach $630 billion in 2022, according to the World Bank. Because India is such an important payment destination, costs are not too high for some payment corridors. Nevertheless, there is much room for improvement, and the paper mentions the other major cross-border CBDC projects, MBridge and Project Dunbar.

Although financial inclusion is one of the motivations, it did not make it to the top of the list. Addressing inclusion will require an offline digital rupee because more than 40% of India’s 1.4 billion people lack internet access.

As with most central banks, the Reserve Bank is not keen on cryptocurrencies and believes introducing a CBDC will provide an alternative for the general public.

CBDC design plans

The Reserve Bank noted that it will remain flexible on implementation models. But it shared its current thinking.

In terms of anonymity, it intends CBDC to be cash-like only for small value payments. It believes it is more logical that the digital rupee does not generate interest. And it is concerned with programmability. For example, it can be used to ensure that agricultural payments are spent on farming and nothing else. A CBDC trial in Brazil is exploring the same topic.

Whether distributed ledger technology (DLT) will be used has not been determined, although scalability issues were noted. Given that CBDC is likely to be distributed via intermediaries such as banks, DLT can be applied to these secondary layers.

Planned wholesale trial

The paper discussed potential tests for a wholesale CBDC. Use cases include settlement of securities transactions for over-the-counter (OTC) instruments without a CSD. It is also considering using a wholesale CBDC to settle the issuance of government securities. And it mentioned the possibility of tokenizing government securities to attract investors across borders.

Legislative changes to support the issuance of a digital rupee were published in March.

Meanwhile, a local news agency reported last month that pilots would start with the four state-owned banks, citing sources.