Sunit Arora gives a run-down of how India’s pilot of a central bank digital currency is faring and what this might mean for the development of payment services on the sub-continent
On December 27, 2023, India’s central bank digital currency (CBDC) crossed 1 million daily transactions. That’s not many in a country of 1.4bn people, but it meets the target set by the Reserve Bank of India (RBI) in December 2022 when it launched the retail pilot for the digital representation of India’s legal tender, dubbed the e-Rupee.
However, just a few months before, in October, daily transactions were as low as 25,000. What caused the year-end spike? It was thanks to Indian banks disbursing employee benefits via the digital rupee.
This haste in meeting a target is at variance with the measured pace India’s central bank has adopted for CBDC. “After all, we are creating a new currency system. We have to be very careful about the integrity and the safety of the CBDC we are creating,” RBI governor Shaktikanta Das emphasised at a recent banking event.
Many top central banks are working on pilots to introduce a CBDC. However, as Das knows, India is uniquely positioned in the digital currency game. India’s Unified Payments Interface (UPI) is the talk of the world for revolutionising digital payments and the central bank recently made the UPI interoperable with the CBDC. A digital currency is the obvious next milestone in what is still a predominantly cash economy. In December 2023, there were 12bn transactions using the UPI, totalling ₹18.23 lakh crore (c £174bn).
Given the numbers at stake, it’s understandable that the RBI is keen to implement the CBDC in a non-disruptive manner. What shape will it take, given the learning from its pilot projects thus far? How will the RBI convince citizens to use the digital tender, especially when many do not see any enhanced value from existing digital payments? What are the risks of introducing digital tender in an economy that values the anonymity of cash?
On the ground
India has not been in favour of cryptocurrencies, but RBI has been quick to adopt blockchain and is using the distributed-ledger method to run the CBDC. First up was the wholesale pilot, which the RBI felt was easier to implement given that it only had to deal with the banks and effect change across a smaller ecosystem. The pilot started with government securities – both primary auctions and the secondary market. Now, it has introduced the CBDC into money market operations and overnight call money markets.
On the retail front, the pilot covers both person to person (P2P) and person to merchant (P2M) payments. The central bank says it is working on various use cases, including the possibility of programmability when the CBDC is used in subsidy transfers. In other words, the bank could decide that the CBDC transferred to the wallet of a beneficiary can only be used for a specified purpose. For example, a farmer could only use the digital currency to buy urea, and so on.
The most significant milestone so far has been the interoperability of the CBDC with the UPI, allowing users to make e-Rupee transactions using the same merchant or QR code used in the UPI. The RBI has also opened a sandbox for startups to test multiple CBDC use cases. The next big milestone could be cross-border currency transfers using CBDCs, which the central bank is examining. It’s a segment in which banks and payment providers currently pocket high margins that a CBDC could slash.
What are the numbers thus far? Given that India’s central bank keeps on reiterating that India’s e-Rupee is a work in progress, it has shared a trickle of data.
What we do know is that 13 banks in 26 cities are operating the retail pilot; and 1.46 million users and 0.31 million merchants are part of it, as of August 31, 2023. According to the RBI’s Handbook of Statistics, e-rupees worth ₹16.39 crore (c £1.5m) were in circulation as of March 2023. Some 65% of these were in the wholesale segment, while the remaining were in the retail segment. Clearly, it’s early days.
The next steps
UPI’s success is the primary reason behind the lukewarm retail response to the e-Rupee. Consumers are not charged for payment transfers via UPI, which is no doubt an important factor behind its explosive growth. The digital nature of the transaction also makes it difficult for consumers to see any tangible difference between a transaction via UPI and that made with an e-Rupee.
Of course, an e-Rupee transaction is distinct from one on the UPI. The UPI is a payment platform that is linked to bank accounts. In the case of an e-Rupee, payments are handled by the RBI and are direct and instant. The bank is not an intermediary. This digital version of cash is supposed to be anonymous in nature.
Recently, the National Payments Corporation of India (NPCI) has been sending signals that UPI will not be a free ride — at least on the merchant front. Last year, the NPCI introduced an interchange fee of 1.1% on merchant payments over Rs. 2,000 made using prepaid instruments such as wallets. Large merchants transacting on UPI may incur a reasonable fee on related transactions in the next three years, said Dilip Asbe, MD and CEO, NPCI.
It seems safe to assume that some sort of fee for a UPI transaction will present itself in the future, though it’s anyone’s guess when this will happen. The government realises that despite the impressive numbers for UPI, digital adoption remains low in India. It doesn’t want to kill the golden goose with charges too early. Once a fee on UPI comes in for consumers, however, a CBDC could be more attractive for them.
Given the pace of technology, CBDC is an eventuality. That said, India remains a predominantly cash economy. The currency-in-circulation-to-GDP ratio was a high 12.7% as of March 2023. The e-Rupee will have to earn the respect of Indians hardwired to physical cash.
Sunit Arora is an independent journalist and editor based in Delhi. His handle on X is @sunitarora