Explained: What is Digital Rupee and what RBI wants to achieve through this?

The Reserve Bank of India (RBI) rolled out the first pilot in the Digital Rupee, or e-rupee, in the wholesale segment for government securities on November 1. The RBI later said that it will follow up on the wholesale e-rupee pilot with a similar trial on the retail side this month itself. The RBI has termed the launch of the central bank digital currency (CBDC) as a landmark moment in the history of currencies in the country and added that it will majorly transform the way of doing business. Now, if you are wondering what e-Rupee is and why it has been launched, read on to find out.

What is Digital Rupee?
e-Rupee is a digital version of currency notes issued by a central bank, a kind of digital money that can be used in contactless transactions. "The central bank digital currency (CBDC) or digital rupee, classifies as money in the digital form of legal tender. It will be exchangeable at par with current currencies, accepted for payments, and regarded as a secure store of value. A Digital Rupee is a digital counterpart of currency notes issued by a central bank. It is a type of money that can be used in contactless transactions," said Mahesh Shukla, CEO & Founder of PayMe.

How is it different from crypto coins?
No clear comparison can be made between the digital rupee and cryptocurrencies because the digital rupee is not a commodity or virtual asset, contrary to cryptocurrencies. The digital rupee can be exchanged for cash as it is equivalent to banknotes. "Unlike cryptocurrencies, a digital rupee is not a commodity or a claim on a commodity or digital asset. Bitcoins don't have an issuer and are not equivalent to cash. The digital rupee is the digital version of banknotes issued by central banks like the RBI and should be exchangeable for cash. The widely used CBDC, which the RBI will continue to print, serve the same purpose but won't be a decentralised asset like cryptocurrencies. You can use the digital rupee as legal tender to make any purchases. Digital rupees may include digital wallets, NEFT, and IMPS," said Rachit Chawla, CEO Finway FSC.

Why has the RBI has come out with the Digital Rupee?

Shravan Shetty, Managing Director, Primus Partners, said that RBI's experiment to launch the e-rupee in a controlled environment is a good move as it will iron out the operational challenges in a closed ecosystem. He said that the move will also help in testing the impact of the digital currency with select mature players in the industry before scaling it up for the retail sector. 

"The launch comes with an aim to boost the digital economy and make the inter-bank market more efficient. It will also help define the governance model that may be required for launching it on a larger scale. The steady growth of digital payments during the pandemic has been a clear indication of the increasing demand for legal digital alternatives for the Indian currency. An important factor to note is that the introduction of the e-rupee will help RBI cut down on the costs associated with paper money, including slowing down the loss of damaged notes. Moreover, the G20 has made enhancing cross-border payments a priority therefore, faster, cheaper, more transparent and more inclusive cross-border payment services would deliver widespread benefits for citizens and economies worldwide, supporting economic growth, international trade, global development and financial inclusion," said Shetty.

Experts said that the actual reason the RBI launched the digital rupee was to help India progress in the race for online currencies. "Another reason for this launch is that cryptocurrencies are gaining importance. Since the digital rupee will increase efficiency and transparency thanks to blockchain technology, the game will surely change. Through this, customers will have continuous access to the payment system. This will also assist in direct payments from Indian customers, which will reduce transaction costs and enable real-time account settlements," said Shukla.

Experts said that e-rupee will enable wholesale and retail customers to have constant access to the payment system. "Indian customers can pay directly, saving transaction costs and enabling real-time account settlements. Additionally, using a digital rupee will speed up border transactions and eliminate the need to open a bank account. Furthermore, the digital rupee will always be portable, unlike cash notes," said Chawla.