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 is planning both a wholesale (interbank) CBDC to settle securities transactions and a general purpose (retail) CBDC for the public. Currently, it intends the wholesale CBDC to be account-based, whereas the retail CBDC will be token-based.
India’s digital rupee motivations
While there are multiple motivations for issuing a digital rupee, the number one goal is to reduce the costs of physical cash management. During the last financial year, the cost of printing and security of cash issuance amounted to almost Rupee 5 billion ($603 million) and was nearly a fifth higher than the previous year.
The second aim of a CBDC is to support digitalization, 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 inbound small-value remittances, which are expected to reach $630 billion in 2022, according to the World Bank. Because India is such a significant payment destination, the costs are not too high for some payment corridors. Nonetheless, there’s plenty of room for improvement, and the paper mentions the other big cross border CBDC projects, MBridge and Project Dunbar.
While financial inclusion is one of the motivations, it didn’t 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 population lacks 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 would remain flexible on implementation models. But it shared its current thinking.
Regarding anonymity, it intends the CBDC to be cash-like for small value payments only. It believes it is more logical for the digital rupee not to offer interest. And it’s keen on programmability. For example, it could be used to ensure agriculture payments are spent on farming and not something else. A CBDC trial in Brazil is exploring the same topic.
Whether or not to use distributed ledger technology (DLT) has not been decided, although scalability issues were noted. Given that the CBDC is likely to be distributed via intermediaries such as banks, DLT might be used at these secondary layers.
Wholesale trials planned
The paper discussed potential tests for a wholesale CBDC. Uses cases include settling securities transactions for instruments traded over the counter (OTC) without a central securities depositary. It is also mulling using a wholesale CBDC to settle government securities issuance. And it mentioned the possibility of tokenizing government securities to attract cross border investors.
Legislative changes to support the issuance of a digital rupee were published this March.
Meanwhile, last month a local news outlet reported that pilots would start with the four state-owned banks, citing sources.