India's payment system can be bolstered through retail CBDC to complement the existing UPI

According to the RBI, the e-rupee would be a token that represents legal tender and would be issued in the same denominations as paper currency and coins currently are.?

?Today, on December 1, the Reserve Bank of India will conduct the first test of a digital rupee for retail payments in Mumbai, New Delhi, Bengaluru, and Bhubaneswar.

?A CBDC is a digital currency issued directly from a country's central bank or reserve bank, which functions as legal tender just like fiat money. CBDCs and cryptocurrencies are not the same, and they serve different purposes. Simply put, CBDCs are digital versions of already-existing fiat currencies and are more stable, whereas cryptocurrency is a digital asset on a decentralised network.??

?Advantages of Issuing a Retail CBDC?

Despite having a robust and growing digital payments system in place, India has several incentives to push for a well-functioning CBDC system. According to Deloitte, the huge success of India's UPI in the digital payments space can be attributed to its incremental advantages. This will help increase digital payment penetration, especially given the number of people who have already signed up for the service.

?No interbank settlements are required with CBDCs, reducing financial system settlement risk. With UPI, money must be sent from one bank account to another via intermediaries, which is not the case with CBDCs. CBDCs eliminate the need for intermediaries.

?Government may save money on printing, storing, and distributing cash if CBDCs are used instead of large cash. CBDCs may assist with targeted distribution of aid and subsidies (direct benefit transfer). Last, there's the increased traction driving cryptocurrencies. Private currencies that are not convertible may come to pose new dangers if they become more popular.

?UPI has been at the forefront of payment digitisation in India, where digital payments have grown rapidly. In March 2022, the digital payments processed via UPI surpassed the milestone of 5 billion transactions for the very first time.

?The most important reason for supporting CBDC is the ability of a central bank to transfer interest rates through payments; and this would be impossible with cash and could apply to both positive and negative rates. There would be further transmission if anyone could hold an unlimited amount of CBDC.

?Is the Banking Sector Going to Suffer?

A CBDC might be made less risky by providing wider access to the bank's balance sheet for funding or by restricting CBDC holdings, particularly in times of duress when the CBDC would be seen as a refuge.

?One issue with a CBDC is that it may not be used as a defence against an alternative currency or stablecoin(s) becoming widespread.

?What’s on the mind for RBI?

?According to the RBI, the e-rupee would be a digital token that represents legal tender. It would be issued in the same denominations as paper currency and coins currently are.?

?The RBI said that users may store e?-R on their mobile phones/devices through a digital wallet provided by the participating banks in order to transact.

?QR codes can be used to make payments to merchants either Person to Person (P2P) or Person to Merchant (P2M).

?A physical cash-like e?-R would offer features such as trust, safety, and settlement finality.

Users can store and transact the digital rupee tokens through a digital wallet provided by the participating banks. The digital rupees will be recorded on the central bank's balance sheet just like other wallets, but the liability will be recorded on the balance sheet.

?The central bank said that it will not earn interest and can be converted to other types of money, such as bank deposits.?

?The entire process of creating, distributing, and using the digital rupee in real time will be tested by the pilot.

?The learnings from this pilot will be used to test different features and applications of the e?-R token and architecture in future pilots.

?A participating customer and merchant location would be covered by the pilot, it said.

?Phase-wise participation in the pilot has been identified for eight banks.

?The four banks— Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank—will join the trial sequence subsequently, after State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank.

The other nine cities to which the pilot will be later extended are: Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla.

?The Reserve Bank said that the pilot programme may be expanded to include more banks, users, and locations as needed.??