Decoding the India’s Digital Rupee Plan

Govcoins, also known as Sovereign digital currencies, is the latest buzzword in evolving world of digital currencies. Almost 90% of the central banks around the world are exploring the possibilities of introducing the digital version of their fiat currencies according to a survey by Bank of International Settlements (BIS) in 2022. Sovereign digital currencies or central bank digital currencies are “digital payment tokens which are issued and fully backed by a central bank and is legal tender”. Bahamas was the first country to officially launch digital version of its currencies named Sand dollar in October 2020. Till date, ten countries have their own digital currencies. Among G20 economies, China is near to launch its Govcoin, i.e. e-CNY. China has successfully completed two pilot projects and it is planning to launch e-CNY after final trails at winter Olympics. Indian central bank is also exploring the possibilities of launching its digital currency named Digital Rupee. Recently, Reserve Bank of India (RBI) has issued a concept note on central bank digital currencies. The concept note highlights the motives, design aspects and economic implications of issuing Digital Rupee. In this blog, I will try to decode the India’s Govcoin plan.

The key motivation behind introducing Digital Rupee is reduction in operational costs that includes costs related to printing, storage, transportation and replacement of banknotes, and costs associated with delay in reconciliation and settlement. The security cost of printing alone was 4984.80 crore INR in financial year 2021–22. Though, at the outset, establishing a CBDC creation/issuance may entail significant fixed infrastructure costs but subsequent marginal operating costs shall be very low. Apart from this, fostering financial inclusion, brining resilience and efficiency and provide public a safe alternative of cryptocurrencies are other motivations behind introducing the Digital Rupee.

RBI is planning to introduce Digital Rupee both for retail and wholesale uses. For retail purposes, RBI is considering token based govcoin; for wholesale the central bank is considering account based govcoin. In a token-based govcoin, the person receiving a token will verify that his ownership of the token is genuine, whereas in an account-based govcoin, an intermediary verifies the identity of an account holder. In terms of technology, RBI is open for decentralized ledger technologies. RBI is considering non-interest bearing govcoin as interest bearing Digital Rupee can disintermediate the financial system that will lead to financial and monetary instability. In terms of privacy, RBI is considering reasonable anonymity for the small transactions.

In short, RBI has almost completed the conceptualization phase. Now it will start the trail phases.