Banking Article, Banking Finance 2023, Banking Finance October 2023


The Indian central bank’s digital currency, known as the e-rupee, is starting to gain attention. Many of us have received messages from our banks inviting us to take part in the pilot test of the retail e-rupee. Some of the more curious individuals among us may have even gone ahead and downloaded the app, which boasts a user-friendly and polished interface. Depending on our level of trust in all things digital, we may have also transferred small amounts of money into our e-rupee wallets.

However, the excitement encounters a significant hurdle at this stage. If you happen to reside in cities like Mumbai or Bengaluru, you might be able to locate merchants who accept e-rupees as payment and make a purchase. But in cities such as Chennai, Jaipur, or Pune, the e-rupee in your wallet is unlikely to be of much use since the network of merchants who accept the Indian Central Bank Digital Currency (CBDC) as payment is virtually non-existent in many places.

For those of us who may have wanted to experiment with e-rupee money transfers, finding like-minded individuals willing to join this experiment can be quite challenging. One may need to search through their social media contacts extensively before finding someone willing to receive a small sum, just for the sake of trying it out.

However, it’s important to note that these are still early daysand we are currently in the pilot phase. The Reserve Bank of India (RBI) is actively testing user responses, the technical capabilities of the infrastructure, security features and more. They plan to refine the final product based on this initial experience. The number of merchants accepting e-rupees is expected to increase significantly once UPI payment QR codes become interoperable with e-rupee payments. Additionally, as more tech enthusiasts express interest in using the e-rupee in the future, it may become easier to find others with e-rupee wallets.

The Reserve Bank of India (RBI) might encounter difficulties in persuading the common citizen to transition from their physical stacks of paper currency or their existing payment wallets and apps to embrace the digital version of the rupee for their everyday transactions.

The Context:

For those seeking clarification on this matter, the e-rupee represents the digital counterpart of the currency issued by the central bank. Each e-rupee can be exchanged for an equivalent denomination of physical currency, possessing nearly all the characteristics of traditional currency—it is legally recognized as a medium of exchange and can serve as a store of value.

Wholesale Central Bank Digital Currency (CBDC) is designed for significant inter-bank and corporate transactions, whereas retail CBDC is akin to the everyday cash transactions conducted by individuals.

Initially conceived as an alternative to private cryptocurrencies like Bitcoin, CBDCs are now regarded by central banks as an additional payment avenue aimed at reducing the reliance on physical cash in the economy and curbing tax evasion.

India, along with other nations, is experiencing significant international pressure in this domain, as progress in CBDC development is occurring rapidly worldwide. According to the Atlantic Council’s CBDC tracker, 130 countries are actively engaged in CBDC projects, with 19 G20 member states in advanced stages of CBDC development. Notably, China has made substantial strides in its pilot CBDC project.

However, most central banks are proceeding cautiously due to the uncertainties surrounding the potential impacts on bank deposits, systemic liquidity, the informal economy, security risks associated with digitizing the entire currency management system and other related factors.

To date, only 11 countries have officially launched a CBDC. These countries tend to have smaller populations or are offshore tax havens, including the Bahamas, Eastern Caribbean Union member states, Jamaica, Nigeria, and Ecuador.

Why Retail Users Might Decline:

In essence, none of the major economies have formally introduced a CBDC. While the wholesale e-rupee could serve to diminish default risks and lower operational expenses for banks, the practicality of the retail e-rupee remains uncertain.

Initially, it may hold a certain novelty value, attracting users seeking to showcase their adoption of this digital innovation. However, whether it will expand and become as deeply ingrained in our daily lives as physical cash or UPI is a subject of debate.

Let’s begin by assessing the e-rupee in comparison to physical cash. The digital rupee wallet mirrors our physical wallet, allowing us to store digital representations of currency notes and coins. This can be used for in-store purchases or transferred to another individual, among other uses. The digital rupee offers greater convenience, eliminating the hassle of carrying physical currency and seeking change from merchants. Nevertheless, the pertinent question arises: “When UPI-based payments already offer these benefits at no cost, what incentive does one have to switch to the e-rupee?”

In numerous cases, cash-based transactions are favored for their ability to escape the scrutiny of tax authorities and other regulatory bodies, preserving anonymity. In other words, the absence of a transaction trail is a primary reason why many individuals, professionals, businesses and service providers still opt for cash payments.

However, in its present form, the e-rupee does not ensure anonymity. Banks possess data regarding transfers into and out of e-rupee wallets, and they are informed of all transactions through SMS notifications. Consequently, those seeking to evade a financial trail are unlikely to embrace the retail e-rupee.

Another group relying heavily on cash consists of individuals within the informal and low-income sectors who lack sufficient resources to maintain bank accounts. These individuals will likely persist in using cash.

E-rupee vs. UPI:

Another challenge for the e-rupee is the widespread adoption of UPI in our society today. Once interoperability between QR codes is established, retail e-rupee can also be utilized in lieu of UPI. The advantage of e-rupee lies in the fact that these transactions do not involve banks, as the funds are already within the e-rupee wallet, potentially resulting in faster payment completion, at least in certain scenarios.

However, the most significant drawback of e-rupee when compared to UPI is that funds held in the e-rupee wallet do not accrue interest. In contrast, money remains in a savings bank account until the UPI payment transaction is finalized, allowing users to continue earning interest income. This factor is likely to sway users in favor of UPI.

Looking ahead, if banks introduce fees for UPI transactions or if e-rupee offers anonymity, the dynamics could shift. Nonetheless, as it stands now, the adoption of e-rupee at the retail level is expected to remain limited.

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