RBI e-rupi

RBI e-rupi

Subject: Economy

Context:

The Reserve Bank of India (RBI) announced that the first pilot in the Digital Rupee, or e-rupee, will commence in government securities from November 1, 2022.

Details:

It will make the inter-bank market more efficient–Settlement in central bank money would reduce transaction costs by preventing the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk.

Concept:

Central Bank Digital Currency/e-Rupee:

• RBI defines the Central Bank Digital Currency as the digital form of currency notes issued by a central bank. 
• It is a sovereign or entirely independent currency issued by the central bank (in this case, RBI), in accordance with the country’s monetary policy.
• Since it is issued by the central bank, it will appear as a ‘liability’(or debt owed) on the bank’s balance sheet.
• CBDC will be considered as a medium of payment and legal tender by all three parties – citizens, government bodies, and enterprises.
• Being government-recognised, it can be freely converted to any commercial bank’s money or notes. So, individuals can own CBDC without opening a separate account.
• Further it  can be exchanged with fiat currency (paper money) in a 1:1 ratio.

How does CBDC differ from existing digital money?

A common form of digital money exists in bank accounts and is recorded as book entries on ledgers of commercial banks. CBDC, another form of digital currency, will directly be on the ledger of RBI.

Forms of CBDC Under Consideration

Digital currency can either be token-based or account-based.

• The token-based will be similar to bank notes i.e a person holding tokens at any given point would presumably be owing the digital currency. The individual token owner will have to verify the legitimacy of his owning the tokens. Such a digital currency will be referred to as CBDC-R.
• Account-based will be similar to owning a bank account i.e., RBI expected to hold an account of all transactions and balances of all CBDC holders. The central bank would also have to maintain a record of ownership of monetary balances.In the case of an account -holder, an intermediary will be responsible for verifying the identity of the account-holder. This digital currency will be called CBDC-W.

Utilization of CBDC-R and CBDC-W

• TheR  in CBDC-R stands for ‘retail’ or ‘general purpose’- it will potentially be utilised by the private sector, non-financial businesses and consumers. It will be an electronic form of cash, predominantly meant for retail-related transactions.
• The W in CBDC stands for ‘wholesale’, utilised for interbank and other wholesale-related transactions. Its use is likely to be restricted to specific financial institutions.

Technology to be used:

The two technologies under consideration are – and

There are two models for issuance and management of CBDCs under the RBI’s consideration:

• Direct model (single tier model) -In the direct model, the central bank will be responsible for managing all aspects of the digital rupee system such as issuance, account-keeping and transaction verification.it is also called the Centrally-controlled databases
• Indirect model (two-tier model).-In this model, the central bank will issue CBDC to consumers indirectly through intermediaries and any claim by consumers will be managed by the intermediary.It is also called Distributed Ledger Technology.

In India, the key motivations to introduce CBDC have been stated as follows –

• Reduction in cost associated with physical cash management
• To further the cause of digitisation to achieve a less cash economy.
• Supporting competition, efficiency and innovation in payments . To explore the use of CBDC for improvement in cross -borderransactions
• Support financial inclusion
• Safeguard the trust of the common man in the national currency vis-à-vis proliferation of crypto assets