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 released a concept paper outlining its motivations and current approach of a digital rupee.

The central bank is planning a wholesale (interbank) CBDC to settle securities transactions and a general purpose (retail) CBDC for the public. Currently, he intends for the wholesale CBDC to be account-based, while the retail CBDC will be token-based.

The Motivations of the Indian Digital Rupee

While there are multiple motivations for issuing a digital rupee, the number one goal is to reduce the costs of physically handling cash. During the last fiscal year, the printing and security cost of issuing cash amounted to almost 5 billion rupees ($603 million) and was almost a fifth higher than the previous year.

The second objective of a CBDC is to support digitization, followed by fostering competition and innovation in payments.

Like many other countries, India wants to improve cross-border payments. The country is the largest recipient of incoming small-value remittances, which are expected to reach $630 billion in 2022, according to the World Bank. Because India is such a major payment destination, the costs are not too high for some payment corridors. However, there is a lot of room for improvement, and the document mentions the other big cross-border projects of CBDC, MBridge and Project Dunbar.

While financial inclusion is one of the motivations, it did not 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 people lack internet access.

As with most central banks, the Reserve Bank is not interested in cryptocurrencies and believes that the introduction of a CBDC will provide an alternative for the general public.

CBDC Design Plans

The Reserve Bank indicated that it would remain flexible in the implementation models. But he shared his current thought.

As for anonymity, he intends CBDC to be similar to cash for small-value payments only. He believes that it is more logical that the digital rupee does not offer interest. And you are interested in programmability. For example, it could be used to ensure that farm payments are spent on farming and not elsewhere. A CBDC trial in Brazil is exploring the same issue.

It has not been decided whether or not to use distributed ledger technology (DLT), although scalability issues were noted. Since CBDC is likely to be distributed through intermediaries such as banks, DLT could be used in these secondary layers.

Planned wholesale trials

The document discussed potential tests for a wholesale CBDC. Use cases include settlement of securities transactions for over-the-counter (OTC) traded instruments without a central securities depository. It is also considering the use of a wholesale CBDC to settle government securities issuance. And he mentioned the possibility of tokenizing government securities to attract cross-border investors.

Legislative changes to support the issuance of a digital rupee were published in March.

Meanwhile, last month, a local media outlet reported that the pilots would start with the four state-owned banks, citing sources.