The Reserve Bank of India has confirmed that its first retail digital rupee pilot will start on December 1. Initially, it will involve four banks in four cities, with another four banks and nine locations already identified. At this stage, it is not a public test with a closed user group of consumers and merchants involved.

Central bank digital currency (CBDC) will be issued as digital tokens in the same denominations as physical cash through banks. Participating banks (State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank) will provide mobile wallets and consumers can pay each other or shop by scanning QR codes. Settlement will be instant and, like cash, the digital currency will not attract any interest.

Additional functionality will be tested in future phases. Previous unofficial reports mentioned that the National Payments Corporation of India (NPCI) is involved. While that is highly likely, it was not confirmed in today’s announcement. NPCI is responsible for most of the payment rails in India.

India’s motivations for a retail CBDC are to reduce the costs of physical cash distribution and for financial inclusion. According to one of the banks involved in the pilot, IDFC First Bank, the digital currency provides better privacy compared to electronic payments. It was suggested that the bank only track it on issuance, but not on subsequent transactions. However, we have yet to hear of any proposed CBDCs around the world that provide a level of privacy equivalent to physical cash.

The four additional banks that will join in the near future are Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank.

Meanwhile, a month ago, the central bank began its first wholesale CBDC pilot program to settle transactions in the secondary market for government bonds.