Game-Changing Propositions
One use case that RBI is yet to talk about is Programmable Payments (Think Direct Benefit Transfer – DBT). With this system in place, citizens can access central bank money that has been programmed for specific purposes like LPG subsidies or fertilizer support. Furthermore, these “programmed e-Rupee ” must be redeemed at authorized banks and outlets to ensure they are not misused; after which recipients have the flexibility to convert them back into regular e-Rupee or physical cash.
Another potential use case could be in Cross Border Remittances. As per a World Bank report, India received remittances worth $100 billion in 2022, making it the top recipient of such transfers globally. Currently, international money transfers require intermediaries (correspondent banks), resulting in high transaction fees and long processing times. e-Rupee remittances could happen in real-time, slashing the time it takes for the intended recipient to receive their payment as the money flows from the digital wallet of the remitter to the digital wallet of the beneficiary seamlessly and directly between the two central bank digital currencies based on the agreed FX rate and protocol. Of course today cross holdings in CBDC’s are not yet possible ( central bank of country X cannot hold CBDC of country Y ) but once this mechanism is established and matures, cross border remittances using CBDC will become an obvious use case. This is already in pilot by SWIFT, BIS and a consortium of banks.
Facilitating secure offline payments can also be a notable benefit of CBDCs, particularly for the approximately 575 million individuals in India who lack internet connectivity. However, offline processing modes of CBDC are still in evolution and involve multiple considerations such as prevention of double spending, loss of device, reconciliation with the central ledger once online, etc.
Insights from the First Few Months of the Pilot Program
So it looks like the e-Rupee-R (retail) hasn’t really caught on with consumers and merchants despite being launched five months ago. While CBDCs can offer a range of benefits like promoting financial inclusion and boosting payment system efficiency, competition, security, and resiliency, an IMF paper suggests that the UPI’s existence might make it less appealing for users to adopt the e-Rupee in India.
However, the newly launched e-Rupee -W (wholesale) system has seen impressive results in its pilot phase, with daily trades of government securities recording up to INR 2 billion. This platform eliminates the need for any settlement guarantee infrastructure, reducing the counter-party risk and providing more efficient settlements at a fast pace. Albeit, with CBDC transactions being settled instantly, banks can no longer enjoy the intraday liquidity that they had when they settled on a netted T+1 basis. This means that banks need to manage their intraday liquidity more actively.
Conclusion:
The RBI’s e-Rupee innovation is primed to revolutionize India’s financial landscape by offering a secure and efficient digital payment system with programmable features, and while wholesale CBDC may become crucial for cross-border payments, leaving the benefits of retail CBDC up for debate.
This crucial first step towards the future of Indian digital payments may take some time to reach widespread adoption – but that doesn’t stop us from imagining how far it can go! So join in on the journey as we stay tuned for what promises to be an exciting development ahead.
