India has started rolling out plans for a digital rupee, joining a wave of countries pushing to make payments and other transactions more efficient through similar steps. But analysts and observers warn uptake could be slow in a nation that has traditionally been heavily dependent on cash.
The country’s central bank said in a paper this month that the “e-rupee” would have “limited pilot launches” in the fiscal year running to the end of next March, without giving a time frame for the broader introduction of a finalized version of the currency.
Eleven nations, including the Bahamas and Jamaica, have launched sovereign digital currencies so far, while China, South Korea, Russia, Saudi Arabia, and another 11 have been running pilots, according to the Atlantic Council think tank.
“Given the technology adoption and progress [in digital payments], you wouldn’t want to be left behind,” said Kunal Kumar Kundu, India economist at financial services company Societe Generale. “It doesn’t make sense not to be there when the tide is definitely towards [digital currencies].”
Such currencies are overseen by each nation’s central bank, making them different from cryptocurrencies like Bitcoin which have increasingly come under the spotlight in recent years. The e-rupee will be “freely convertible against commercial bank money and cash,” the Reserve Bank of India said in its paper.
“It is the responsibility of [the] central bank to provide its citizens with a risk-free central bank digital money which will provide the users the same experience of dealing in currency in digital form, without any risks associated with private cryptocurrencies,” said the RBI.
It added that cryptocurrencies could “undermine … authorities’ potential to determine and regulate monetary policy and [the] monetary system.”
The move follows a sharp spike in digital payments in India amid the COVID-19 pandemic, led by apps such as Paytm, PhonePe, and Google Pay. Indeed, RBI data shows the number of such payments shot up 64% from the year before to about 72 billion in the financial year that ended in March 2022.
The RBI said the e-rupee will cut the cost of cash management for the country, with the bill for producing physical currency hitting INR 50 billion (USD 60 million) in the 2022 fiscal year. And, with India being the world’s largest recipient of remittances at USD 87 billion in 2021, the central bank also expects the digital currency to boost cross-border payments.
Meanwhile, the RBI is also working on ways to enable access to digital currency without an internet connection—a move it says will help distribute financial aid and subsidies to millions of Indians living in remote areas. Only 825 million of India’s 1.4 billion people have internet access, according to government estimates.
Possible approaches include letting users download e-rupees to a dedicated wallet on a phone. Currencies could then be shifted from one phone to another using Bluetooth and other near-field communication technologies, according to the RBI.
“If [subsidies] are given in a digital format to an e-rupee account, its usage can be possibly traced,” said Mihir Gandhi, partner, payments transformation at PwC. “The government can ensure that the money is being used for the purpose it is meant to be.”
But for similar reasons, persuading would-be users to adopt digital currencies could be tricky for the government and banks, said Madan Sabnavis, chief economist at Bank of Baroda.
The traceability of e-rupee transactions could become a deterrent to its uptake in India where cash transactions are still hugely popular, largely because of their anonymity. According to government data, the volume of banknotes in circulation rose 5% on the year in fiscal 2022, underscoring their enduring popularity, with the high-denomination INR 500 (USD 6) bill accounting for 35% of the total volume.
“When you get to digital currency, it can never become anonymous, and the identity of the persons [involved in the transaction] is known,” said Sabnavis. “It can never replace physical currency.”
Another possible hurdle is that the government may need to ensure bank accounts holding the digital currency offer consumers the same benefits as any other, especially when it comes to factors such as interest payments.
On the other hand, banks could suffer if there’s a sudden rush toward the e-rupee. “In the case of large-scale adoption [of the e-rupee], there could be a challenge that more low-cost deposits move out from banks to the digital form,” said Kundu. “If the banks start losing out on low-cost deposits, their cost of capital would be higher.”
The RBI also noted in its paper that digital currencies could “pose certain risks that may have a bearing on important public policy issues, such as risk to financial stability, monetary policy, financial market structure and the cost and availability of credit,” without elaborating.