Cashless Society – Digital Payments, Demonetization, etc.

India’s Central bank digital currency (CBDC) in detail


From UPSC perspective, the following things are important :

Prelims level: CBDC and applications

Mains level: Read the attached article in detail


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  • The Reserve Bank of India (RBI) has launched the first pilot of the retail digital rupee, also known as e₹-R, on December 1, 2022. The digital token that represents legal tender will be issued in the same denominations as paper currency and coins. The RBI’s pilot on the digital rupee will test the robustness of the new system. Let’s understand it in detail.


The first pilot project of retail digital rupee

  • Allowed banks: Initially, only four banks- State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank in four cities have been allowed to offer e₹-R. The scope of the pilot will be increased gradually to include more banks, users and locations.
  • Transaction: People will get e₹-R from banks and will be able to make transactions via their digital wallets. The digital rupee can be stored on mobile phones or devices.

What is a Central bank digital currency (CBDC)?

  • Like fiat currency in digital form: CBDC is a legal tender issued by the central bank in digital form. Like rupee notes or coins, which are in physical form. Like fiat currency, it can also be exchanged between people. Simply, put it’s just like rupee (₹) notes but in digital form (e₹). You can also exchange e₹ for physical currency notes.
  • Unlike fiat currency no need to have account: However, unlike fiat currency that’s usually stored in banks and hence their liability, CBDC is a liability on the RBI’s balance sheet. That’s why you don’t necessarily need to have a bank account to own a digital rupee.

Why do we need CBDC?

  • Cost efficient management: CBDC will cut the cost related to physical cash management. India spent ₹4,984.80 crore on printing money in FY22 and ₹4,012.10 crore a year before that. These expenses are borne by people, businesses, banks and the RBI. e₹ cuts all kinds of printing, storage, transportation and replacement and settlement costs. Though the RBI will invest a significant amount in building CBDC infrastructure, subsequent marginal operating costs will be very low.
  • Boost to digital economy and financial inclusion: It’ll fulfil the higher cash requirement of the country. The government will be able to make money available in areas where it’s a challenge to provide physical cash. Also, it’ll boost India’s digital economy, enhance financial inclusion, and make the financial system efficient.
  • People will have money in uncertain times: Since e₹ is the central bank money, in any uncertain situation like COVID-19, it’ll save people’s savings. Banks only insure deposits up to Rs 5 lakh. In case of defaults, people could lose their savings.
  • Multiple saving and transaction options: e₹ will provide you with other options like e-wallets, mobile banking, and UPI to make payments.
  • Much safer payment option: e₹ is a safe central bank instrument, with direct access to the RBI money for payment and settlement. It is an electronic version of cash, whose main use case is retail


Will CBDC replace UPI?

  • Not expected to substitute but supplement payment option: The CBDC-based payment system is not expected to substitute other modes of existing payment options. It will supplement by providing another payment avenue to people.
  • India already has a sound payment system: UPI uses your money deposited with banks but with CBDC, the money becomes the liability of RBI India already has a sound payment system, with payment products like RTGS, NEFT and UPI, etc., coupled with an exponential increase in digital transactions.

No interest on e₹? but why?

  • No interest on digital money: According to the RBI, if it starts paying interest on digital money, it could lead to a massive disintermediation in the financial system, in which banks will lose deposits, and thus hurt their credit creation capacity in the economy.
  • Rationale behind No interest on digital rupee: Banks may be compelled to increase deposit rates, which will increase their costs of funding and decrease net interest income. Ultimately, the cost will be passed on to borrowers.
  • CBDC will be attractive payment option without interest: If there is no interest, CBDC can still be attractive as a medium of payment, even while its attractiveness as a savings instrument diminishes. Also, banks would restrain themselves from distributing CBDCs if they find it as a threat to bank deposits, which can hamper credit flows and the adoption of CBDCs.


How will CBDC be different from crypto?

  • CBDC is Algorithm based unlike crypto mining: The central bank will be issuing CBDCs based on algorithm-driven processes, rather than mining through competitive reward methods. These algorithms will have energy efficiency and environmental friendliness as their core principles, unlike private crypto mining.
  • Less energy consumption unlike crypto: Therefore, issuance and management of CBDCs are expected to have much lesser energy consumption vis-à-vis more energy-intensive processes normally associated with the mining and distribution of private cryptocurrencies.
  • Legal consumer protection: Unlike private cryptos wherein any individual can compete to mine and create the cryptocurrency, only the central bank can issue the CBDC and can simply opt for conversion of the bank’s existing balances to CBDC balances. So, CBDCs will provide the public with the benefits of virtual currencies, while ensuring consumer protection by avoiding the damaging social and economic consequences of private virtual currencies.

Why India needs a digital rupee?

  • Online transactions: India is a leader in digital payments, but cash remains dominant for small-value transactions.
  • High currency in circulation: India has a fairly high currency-to-GDP ratio.
  • Cost of currency management: An official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.


  • e₹-R is a digital token that has real value like rupee notes or coins. CBDC will make transactions and currency exchange smoother, and it’ll boost financial inclusion. The RBI’s pilot on the digital rupee will test the robustness of the new system.

Mains question

Q. What is central bank digital currency? Why do we need CBDC? It is said that digital rupee is different from crypto currency. Discuss.

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