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Mumbai: The Reserve Bank of India (RBI) on Tuesday announced a trial for retail digital rupee (e -R) beginning 1 December, with four banks in as many cities participating in the pilot programme, a month after testing the wholesale central bank digital currency (CBDC).

In a press release, RBI said the pilot would cover select locations in a closed user group (CUG) comprising participating customers and merchants. While it has identified eight banks for gradual participation in the pilot, the first phase will begin with four: State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank.

The remaining four—Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank—will subsequently join the trial, it said. While the retail CBDC would initially cover Mumbai, New Delhi, Bengaluru and Bhubaneswar, the trials will be later extended to Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna and Shimla.

“The e -R would be in the form of a digital token that represents legal tender. It would be issued in the same denominations that paper currency and coins are currently issued," the statement said.

The advantage of CBDC over existing digital payment systems is that payments through digital currency would be final, without requiring interbank settlement.

Users can transact with e -R through a digital wallet offered by participating banks and stored on mobile phones. According to RBI, digital rupee transactions can be both person-to-person and person-to-merchant. It said that payments to merchants could be made using quick response (QR) codes displayed at merchant locations.

“The e -R would offer features of physical cash like trust, safety and settlement finality. As in the case of cash, it will not earn any interest and can be converted to other forms of money, like deposits with banks," RBI said.

According to V. Vaidyanathan, chief executive, IDFC First Bank, the central bank digital currency would give greater anonymity than exiting digital transactions and this is one of the major benefits for users. “In due course, it could even get better. India is a growing economy and while it already has several digital payment channels, this would add to the options available before users. At present, it is being done on a pilot basis, but in future, it will be the next big thing in the payments space once it gathers some critical mass," said Vaidyanathan.

The pilot will test the robustness of the entire process of digital rupee creation, distribution and retail usage in real-time, RBI said, adding that different features and applications of the retail digital rupee token and architecture will be tested in future pilots, based on the learnings from this pilot.

“The scope of the pilot may be expanded gradually to include more banks, users and locations," it said.

Last July, RBI deputy governor T. Rabi Sankar spoke at length about the relevance of CBDC in the Indian context, given that domestic payment systems are largely real-time and transaction costs are perhaps the lowest in the world. In fact, a pilot survey conducted by RBI on retail payment habits of individuals in six cities between December 2018 and January 2019 showed that cash remained the preferred mode of payment for receiving money for regular expenses. For small value transactions—of up to 500—cash is used predominantly.

Sankar had said that the preference for cash represents a discomfort for digital modes of payment, and CBDC is unlikely to replace such cash usage. But the preference for cash for its anonymity can be redirected to acceptance of CBDC, as long as anonymity is assured, he had said.

ABOUT THE AUTHOR

Shayan Ghosh

Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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