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22 December 2022, Gateway House

India’s Digital Rupee: Opportunities and Concerns

On Dec 1, the Reserve Bank of India introduced the Indian Digital Rupee-R (retail) on a pilot basis with four participating banks. Reserve Bank historian and former central banker Bazil Shaikh explains what a digital rupee is vis a vis traditional money, the advantages and concerns, and its future in cross-border transactions.

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Gateway House (GH): What is a Central Bank Digital Currency (CBDC) and how is it different from money as we know it?

Bazil Shaikh (BS): CBDC is a form of digital money denominated in the national unit of account. It is issued as a digital token[1] and seeks to replicate physical banknotes[2] or traditional money in a digital form.

CBDCs are backed by the state authority and keep principles of issue unaltered. Issued as a fiat central bank liability, they have legal tender status, i.e., good to discharge debt and pay taxes. They provide continuity rather than cause disruption.

Retail CBDCs, such as the e-rupee, can be acquired from banks and stored in e-wallets.  They are designed to be used for peer-to-peer payments. When any individual or merchant makes a payment using CBDCs, the money moves from one wallet to the other. There is no routing or intermediation by a bank.

CBDCs provide the convenience of the digital medium while offering the institutional credibility of central banks. They offer holders the convenience of settlement finality, liquidity and integrity and enhance the ability of central banks to conduct monetary policy.

GH: What is the purpose or goal to be achieved in launching a CBDC for India?

BS: Central banks view money as a public good. The motivation for RBI introducing a digital rupee is to provide users a safe and secure means of digital payment in the public interest. The e-rupee offers a stable regulated currency alternative to holders of digital assets. The effort is to mitigate the risks of private money creation such as price volatility and total loss, evidenced in the recent FTX exchange collapse.

The e-rupee also seeks to reduce costs of currency management, prevent illegal activities such as money laundering, provide efficient solutions for financial inclusion and foster innovation. It could also enhance the efficiency of cross-border payments, provided countries work together to make their designs and systems compatible.

GH: In what ways are CBDCs similar to and different from cryptocurrencies?

BS: Cryptocurrencies are digital tokens that are used as a means of peer-to-peer payments and serve as assets. They are issued by private entities and are not denominated in the national currency. Most are not based on any underlying assets, possess no intrinsic value, and none are backed by any sovereign or other authority.

Cryptocurrencies are typically representations of abstract value. They derive their value from supply-demand dynamics and “algorithmic scarcity”:  their value is underpinned by the expectation that their numbers will be limited and will follow pre-announced rules grounded in mathematical codes and encryptions.

Cryptos seek to replace the confidence provided by the institutional arrangement of the central bank and state backing, with confidence in mathematical rules, cryptographic security and a decentralized self-governance system. Transactions are typically stored using a decentralised public ledger known as a ‘blockchain’ which allows users to confirm transactions without the need for a central clearing authority or an intermediary such as banks.

The Bank for International Settlements (BIS), which represents the received views of most central banks, does not view cryptocurrencies with favour and feel they have ‘few redeeming public interest attributes’. [3]  While some quarters view cryptocurrencies as instruments of freedom, the collective efforts of regulators around the world are unlikely to favour cryptocurrencies which typically side-step the purview of central banks and national jurisdictions.  CBDCs, with legal backing on the other hand, are seen as a stable alternative to crypto-assets and the risks they entail.[4]

GH: What benefits do CBDCs offer holders beyond the existing online payment systems? Are there any concerns and risks related to CBDCs?

BS: India has established itself in online payment systems, which are proven and efficient. The existing digital payments are based on interest-bearing bank deposit accounts while CBDCs do not pay interest. Thus, CBDCs, as risk free assets, will be attractive to holders[5] only in case banks are experiencing stress with the possibility of bank failure. While CBDCs enhance state capability, Christopher Waller, Board of Governors of the Federal Reserve System[6] as well as the UK’s Economic Affairs Committee,[7] have viewed CBDCs as ‘a solution in search of a problem’.

CBDCs introduce the concept of “programmable money”. For instance, some money tokens could be programmed to be valid for specific purposes – say, only for the purchase of food. This alters the nature of money as anything ‘generally acceptable’ as a means of payment and for the settlement of debt.  It could also be programmed to expire on a particular date or incur demurrage, i.e., reduce in value over the period it is held, implying negative interest rates. Such possibilities enhance options for monetary policy and financial inclusion but reduce individual choices. They could potentially impinge on individual autonomy, shifting agency from individuals to an all-controlling state.

The RBI has assured ‘reasonable’ anonymity for small value transactions and CBDCs would be more anonymous than online payments. However, privacy and surveillance concerns remain as all digital payments leave a trail and CBDCs are ‘highly unlikely’ to offer anonymity.[8]

Another concern is the possible flight to safety from bank deposits to CBDCs wallets in times of stress. This could impact intermediation and credit availability, increasing rather than mitigating financial instability. Finally, there would be the possibility of CBDCs being vulnerable to a cyber-attack or to a systems failure.

GH: Would the reimagination of money in the form of CBDCs impact society or would it be business as usual?

BS: The issuance of CBDCs is an experiment in the issuance of money. Money is meaningless in isolation. It is a social construct which mediates between individuals and their socio-economic ecosystem. It relates to human choice and the personal freedom to transact.

Policymakers typically highlight the efficiency gains that changes they propose will bring. They also seek to address and mitigate the concerns. The job of civil society is to highlight the possible consequences of these changes and whether the risks are acceptable.

The BIS is strongly in favour of CBDCs. The benefits of introducing the e-Rupee would have to be weighed against the risks society is willing to accept.  Given India’s standing in the area of digital payments and the sheer size of the endeavour, the Indian CBDC experience will be looked at with great interest across the world.

Bazil Shaikh, PhD., a former central banker, is the author of The Conjuror’s Trick: An interpretive history of paper money in India (MARG, 2020); Mint Road Milestones: RBI at 75 (Reserve Bank of India, 2010); The Paper and The Promise: A Brief History of Paper Money in India (Reserve Bank of India, 2000)

Sifra Lentin is Fellow, Bombay History, Gateway House

This interview was exclusively conducted for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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[1] CBDC is conceivable in both retail and wholesale forms. Retail CBDC or general purpose CBDC is designed to be held and used by individuals. Wholesale CBDCs are available only to a selected set of financial institutions. See: BIS (Bank for International Settlements report, Central Bank Digital Currencies. Committee on Payments and Market Infrastructure (Basel, BIS, 2018). Link:

[2] CBDCs are digital non-fungible tokens (NFTs), while traditional banknotes are physical NFTs.

[3] Bank for International Settlements (BIS) (2020): “Central bank digital currencies: motives, economic implications and the research frontier”. BIS Working Papers No 976 retrieved from on December 12, 2022.

[4] Bank for International Settlements (BIS) (2022): “The future monetary system” BIS Annual Economic Report. 21 June 2022. Basel. Link:

[5] In this context, a holder is a person who has acquired the CBDCs or digital tokens and is holding it in a wallet in a mobile device. This is similar to a person holding physical notes in a wallet.

[6] Waller, Christopher J.(2021): CBDC: A Solution in Search of a Problem? Speech at the American Enterprise Institute, Washington, D.C. on August 05, 2021 retrieved from on December 12, 2022.

[7] House of Lords Economic Affairs Committee (2022): “Central bank digital currencies: a solution in search of a problem?” HL Paper 131 13th January 2022 retrieved from on December 12, 2022

[8] Reserve Bank of India. (2022). Concept Note on Central Bank Digital Currencies. FinTech Department. October 2022.