RBI launches Digital Rupee: What is it and how it differs from physical notes | Full list of eligible banks, cities; how it's different from UPI, IMPS

RBI launches Digital Rupee: The Reserve Bank launched the first pilot for retail digital rupee (e₹) on December 1 (Thursday). The pilot, RBI said, will test the robustness of the entire process of digital rupee creation, distribution and retail usage in real time.

Different features and applications of the (e₹) token and architecture will be tested in future pilots, based on the learnings from this pilot.

Retail Digital Rupee launch cities 

The Central Bank Digital Currency (CBDC) has been launched in Mumbai, New Delhi, Bengaluru and Bhubaneswar on December 1, and later it will be expanded to nine more cities in the initial phase. This follows a month after the RBI had started a pilot in the digital rupee - wholesale segment on November 1.

How Digital Rupee is different from UPI, IMPS?

Unlike the Unified Payments Interface (UPI), which is managed by bank intermediaries in collaboration with RBI, the Digital Rupee will be directly operated by the Reserve Bank of India (RBI).

Rachit Chawla, SEBI registered financial Advisor & CEO of Finway FSC said, "A notable difference between the two is that every rupee transferred by UPI is equivalent to the physical currency. The case is quite different in terms of the Digital Rupee, as it will not necessarily be equivalent to the physical currency. It can be separately used as legal tender and will have a its own distinct value."

Retail Digital Rupee launch Banks

The first phase of retail digital rupee began with four banks -- State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank in four cities across the country.

What is Digital Rupee (Central Bank Digital Currency - CBDC)? 

CBDC is a digital form of currency notes issued by a central bank. While most central banks across the globe are exploring the issuance of CBDC, the key motivations for its issuance are specific to each country's unique requirements.

The (e₹) would be in the form of a digital token that represents legal tender. It would be issued in the same denominations that paper currency and coins are currently issued. The digital rupee would be distributed through intermediaries (banks). The government of India had announced the launch of the digital rupee from fiscal year 2022-23 onwards in the Union Budget tabled in Parliament on February 1, 2022.

Retail Digital Rupee transactions 

The users will be able to transact with (e₹) through a digital wallet offered by the participating banks and stored on mobile phones/devices. Transactions can be both Person to Person (P2P) and Person to Merchant (P2M). Payments to merchants can be made using QR codes displayed at merchant locations. 

The (e₹) would offer features of physical cash like trust, safety and settlement finality. 

Retail Digital Rupee - More banks to participate

Eight banks have been identified for phase-wise participation in the pilot. After State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank, four more banks -- Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank -- will join the pilot subsequently.

Retail Digital Rupee - More cities will be added 

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

Difference between wholesale segment and retails segment

According to Mr Rachit Chawla the model chosen for the retail rupee is different from the earlier announced for the wholesale rupee which is being used by banks for government security transactions. The token-based mechanism as announced by RBI for retail is more suited for the common retail customers both for individual customer transactions with selected merchants and also for one individual with another individual, initially to be used within the selected closed group.

Whereas the Wholesale CBDC is designed for restricted access to selected financial institutions. It has the potential to transform the settlement systems for financial transactions undertaken by banks in the government securities (G-Sec) segment, inter-bank market and capital market through efficient and secured gateways. 

Digital Rupee - Concept note

In a recent concept note on Central Bank Digital Currency, the RBI said CBDC is aimed to complement, rather than replace, current forms of money and is envisaged to provide an additional payment avenue to users, not to replace the existing payment systems. Across the globe, more than 60 central banks have expressed interest in CBDCs with a few implementations already under pilot across both retail and wholesale categories and many others are researching, testing, and/or launching their own CBDC framework.