Assessing the progress of the digital rupee

Written by Kapronasia || August 29 2023

Why is it that central bankers are always more enthusiastic about CBDCs than anyone else? That seems to be the case with India’s digital rupee, which appears to not be seeing especially fast uptake in its second year of testing. In July, the Reserve Bank of India (RBI) asked Indian banks to step up their participation in pilot programs because it wants to increase transactions.

At present some large state-owned and private lenders, including State Bank of India (SBI.NS), Bank of Baroda, ICICI Bank, HDFC Bank, Kotak Mahindra Bank and Yes Bank are participating in a digital rupee pilot. The RBI wants to expand the scope of the pilot to include smaller banks and probably fintechs too as they can help the smaller incumbent banks with the requisite technology. While the regulator can lean on big state banks to support a national initiative, it probably needs to make a stronger case to get fintechs to participate. According to a source quoted by Reuters in July, the process is likely to take four to five months.

Data about CBDC uptake in India thus far have been limited. In July, RBI Deputy Governor T Rabi Sankar said in a speech that there are “1.3 million customers and 0.3 million merchants” using the Indian CBDC as of June. However, it is unclear with how much frequency they are using it. If we knew, we would better be able to gauge if the RBI is likely to hit its target of 1 million daily transactions by year-end.

The justification for a digital rupee has always been a little shaky. In a nutshell, it arose in part as a means for the RBI to prevent cryptocurrency from gaining a strong foothold in India’s financial system. If the future of money was going to be digital, then the Indian central bank wanted to be the one setting the tone. That in itself is reasonable enough, but in reality, there is not a straight line one can draw between private cryptocurrencies and a CBDC. Part of crypto’s appeal has always been its decentralized and anonymous nature. It’s a different beast than a CBDC altogether.

Second, India has already done an exceptional job of creating a digital payments ecosystem, in large part thanks to the success of the United Payments Interface (UPI) platform and payments rail. In fact, UPI is so successful that the RBI has gone on the defensive, insisting that the digital rupee will not compete with it. PwC’s Indian Payments Handbook notes that UPI accounted for 75% of overall transaction volume in the retail segment in 2022-23 and is expected to reach 1 billion per day by 2026-27, accounting for 90% of retail digital payments in the country.

It's not so dissimilar from how Alipay and WeChat Pay are so popular in China that uptake of the digital renminbi has been modest at best. And though the policy tools available to the Chinese government to promote CBDC uptake are more extensive than what New Delhi can deploy, the fact remains that China’s existing digital payments ecosystem is already very good.

Meanwhile, it seems that the RBI is out of sync with the momentum we are seeing among central banks to embrace stablecoins. Sankar said last month that stablecoins are beneficial to economies such as the U.S. and Europe, to whose currencies the stablecoins may be linked. But in a country like India, he worries they could potentially replace the use of the rupee in the local economy. "If large stablecoins are linked to some other currency, there is a risk of dollarization,” he said.