The Reserve Bank of India is getting ready to start using its central bank digital currency (CBDC), which it 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. It is sometimes referred to as the "digital rupee."

The RBI's CBDC, also known as the e-rupee or the digital rupee, is a new way to utilize money that isn't much different from the banknotes that are now in circulation. The only difference is that the digital rupee is anticipated to be used more frequently and traded digitally.

The E-rupee is RBI’s accepted version of cryptocurrencies, which the central bank has dismissed repeatedly and called a serious challenge to the stability of the financial system of the country.

The Reserve Bank of India is getting ready to start using its central bank digital currency (CBDC), which it 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. It is sometimes referred to as the "digital rupee."

The RBI's CBDC, also known as the e-rupee or the digital rupee, is a new way to utilize money that isn't much different from the banknotes that are now in circulation. The only difference is that the digital rupee is anticipated to be used more frequently and traded digitally.

The E-rupee is RBI’s accepted version of cryptocurrencies, which the central bank has dismissed repeatedly and called a serious challenge to the stability of the financial system of the country.

What Is Digital Rupee?

A digital currency is any currency that is available entirely in electronic form. Currencies’ electronic types already predominate a large number of nations’ financial systems. Digital currency, however, is exclusively exchanged through virtual means and does not leave a computer network.

The three major varieties of digital currency are cryptocurrency, central bank digital currency (CBDCs) and stablecoins.

The foundation of cryptocurrency is provided by blockchain technology which is the most usual form of distributed ledger used by digital currencies. According to CoinMarketCap, the availability of cryptocurrencies is more than 21,000.

How Will It Work?

At businesses that accept e-RUPI, customers  can use their CBDC voucher without a card, a digital wallet, or internet banking access. Organizations or the government would send the beneficiaries e-RUPI by SMS or QR code for a certain activity or purpose.

This contactless e-RUPI is simple, secure, and safe because it entirely protects the beneficiaries' personal information. Because the necessary amount is already saved in the voucher, the complete transaction process using this voucher is significantly quicker and more reliable.

What Are The Advantages Of Digital Rupee?

Here are some of the advantages of digital currency:

1. Faster Mode of Payment : Payments made with digital currency can be done much faster than with traditional methods like wire transfers or automated clearing houses, which require days for financial institutions to authenticate a transaction.

2. Cheaper Global Transfers : Global transactions can occasionally become exceedingly pricey. People pay expensive fees to transfer money from one country to another, particularly when currency conversions are involved. Digital assets have the potential to disrupt this market by making transactions swift and inexpensive.

3. 24/7 Availability : Daily and weekly, transactions involving digital currency go at the same rate. On the other hand, as banks are closed on weekends and after regular business hours, current money transfers typically take longer during those times.

4. No Manufacturing Required : There are numerous criteria for physical currencies, including the construction of actual production facilities. In contrast, there is no such expense associated with digital currency. Digital currencies are also resistant to soiling and other physical flaws that might occur with physical currency.

5. Well-organized Government Payments : Instead of attempting to figure out prepaid debit cards or mail individuals a check, the government could transfer payments like child benefits, food stamps, and tax returns to people instantaneously if it created a central bank of digital currency.

What Are The Disadvantages Of Digital Rupee?

Here’s a list of some drawbacks of the digital rupee:

1. Options : The popularity of cryptocurrencies is a major drawback. Lilya Tessler, the leader of Sidley's FinTech and Blockchain department, claims that various digital currencies are being developed on various blockchains, each with its own restrictions.

Determining which digital currencies might be useful in particular circumstances will take some time. It also involves the question of whether a select few are intended for mass adoption.

2. Costly Transaction : Cryptocurrency uses Blockchain technology to validate and record transactions, computers must solve difficult equations. This uses a lot of electricity, therefore the more transactions, the more expensive it is.

However, given sophisticated consensus processes are not necessary and CBDC would probably oversee them, this would probably not apply to the central bank of digital currencies.

3. Steep Learning Curve : Using digital currencies requires effort on the part of the user to master basic skills like how to access a digital wallet and safely store digital assets. The method must be made simpler for digital currencies to be widely used.

4. Issues of Cybersecurity : Digital currency is stored using less secure techniques, hence individuals are continuously concerned about cybersecurity and are exposed to several risks.  Cyberattacks are likely on the rise and pose a threat of virtual theft to users of digital currency.

Do We Need the Digital Rupee?

The RBI's decision to introduce a digital rupee is primarily intended to advance India in the race for virtual money. And, of course, since cryptocurrencies are becoming more and more important.

• The digital rupee will become more efficient and transparent thanks to blockchain technology.

• Ledger upkeep and real-time tracking will both be possible with blockchain.

• Both wholesale and retail clients will have constant access to the payment system.

• Indian customers can make payments directly.

• A lower cost per transaction.

• Account settlements in real-time.

• To use a digital rupee, you don't need to open a bank account.

• Swift international transactions.

• There is no volatility risk since the RBI will support it.

• Unlike currency notes, the digital rupee will always be portable.

• But can CBDCs step up their game in the face of a massive payment system like UPI? 

Cash continues to be the preferred method of payment for obtaining funds for regular expenses, according to a poll by the RBI. Small value transactions (amounts up to INR 500) are mostly done with cash.

Impact On Indian Economy

Let's Now Understand How Digital Currency in India will Impact Its Economy:

1. Disrupting the Money Transfer Service Industry : The domestic and international money transfer industries are subject to set turnaround times, batch runs, bank holidays, weekends, etc. However, digital currency transactions will proceed quickly and continuously, and associated costs are anticipated to be less than the going rates. With built-in currency compatibility, digital currency in India might upend the global money transfer services market.

2. Achieving Cashless Economy : Many individuals find physical cash's anonymity to be appealing, and it won't be eliminated any time soon. However, as a result of the e-Rupee's expansion of financial inclusion, India should witness a rise in the acceptance of a cashless payment ecosystem. In this way, e-Rupee, a type of digital currency, will assist the government in establishing a cashless society.

A cashless economy provides freedom from the risk of carrying and storing currency as well as the convenience of digital transactions to its citizens.

3. Better Implementation of Government Schemes : CBDC can assist with Direct Beneficiary Transfers that are designated for particular goals. CBDC can be scheduled for particular events and times. For instance, only the designated beneficiary of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) may receive and use a specific quantity of digital currency.

Similarly, payments for LPG (cooking gas) handouts will only be accepted in specific locations. This means that if you receive a government grant for LPG in CBDC, you can only use it to digitally pay an authorized LPG agency.

It highlights how CBDC is set to play a significant part in the grassroots and last-mile implementation of government programs, policies, and aids.

Key Takeaways

The RBI hopes to solve issues with current physical currencies and international trade by adopting the digital rupee.

Money transfers across borders and currency exchanges are time-consuming and expensive. The fast cross-border money transfer is expected to improve bank cash management and operations with the introduction of the digital rupee.

Cash placement and tracking are difficult in India. CBDC can address anonymity, find a non-threatening solution, and lessen the need for payment. The government will reduce operational, printing, distribution, and storage expenses, advancing its goal of a cashless society.

The impact of the digital rupee is anticipated to spread throughout the Indian economy after it has been included in the country's monetary system. It is widely expected that benefits of the CBDC, such as decreased use of physical cash and higher transaction speed and digital efficiency, will have this effect. If CBDC is implemented well, it will have significant economic benefits and help India's economy thrive financially.