e-Rupi: Can a digital rupee work?

The idea of a digital rupee is immediately polarizing. Getting insights into its mechanisms and whether it is an opportunity or a significant risk for India’s economy is critical. Especially in an era where the world is fraught with rising geopolitical risks that are set to acquire a shimmering crescendo.  Against such a backdrop, could there be a case for digital rupee?

 

The idea behind a digital rupee is succinct. In essence, as per the PIB, the e-Rupi is envisaged by the government of India as being:

• A cashless and contactless instrument for digital payments developed by the National Payment Corporation of India
• Connects sponsors of the services with beneficiaries and service providers digitally
• Assures timely payments without the involvement of any intermediaries
• Can be leveraged for delivering services meant for providing drugs and nutritional support under mother and child welfare schemes, TB eradication programmes, etc

The case for the e-Rupi

The idea of a central bank digital currency (CBDC) isn’t one that has existed in isolation. It’s an idea that many countries today are considering as banking systems worldover are undergoing a technological renaissance.  Imagine having a seamless financial payments ecosystem that is secure, accessible, and inclusive; this is precisely what the e-Rupi can facilitate.

As per a survey by bank for international settlements that was conducted in 2021, 86 per cent of central banks globally are considering CBDCs. 60 percent of them are evaluating the technology to be implemented for CBDCs.

India especially with its robust fintech ecosystem is well positioned to make the e-Rupi effective. It could further consolidate the country’s position as a leader in the digital payments ecosystem. Neobanks and India’s banking ecosystem apart from other stakeholders in the fintech are working towards building a next generation payments architecture that is robust and futureproof. This is a payments ecosystem that could leverage technologies such as the blockchain or another form of distributed ledger technology as well as cloud and potentially Artificial Intelligence to bring a drastic overhaul to the digital payments landscape. Not only will digital payments be faster but they will also have a greater degree of security owing to a decentralized ledger interface.

Can you imagine having seamless domestic and cross border transactions that are automated, quick, and inexpensive? A CBDC such as the e-Rupi could be the harbinger of just such a revolution. Some of the facets that are impelling CBDCs to revolutionize the international payments landscape are:

• There is a lot of momentum for CBDCs as many central banks across the work are working towards their own versions of CBDCs in the next 5 years
• CBDCs can be instruments that support the public policy objectives of the goverment by providing safe and secure means of payments
• CBDCs can promote efficient, inclusive, and innovative payments as they can be used as a tool for offline payments
• CBDCs are fast and save expenditure in transaction costs due to a lack of intermediaries as well as circumventing the need for printing currency

A changing payments ecosystem

 A CBDC has the potential to increase competition in the payments sector of a country in two ways:

(i) directly, by providing an alternative payment system that competes with existing private players, and

(ii) indirectly, by providing an open platform for private players, lowering entry barriers for newer players offering more innovative services at lower costs

The CBDC would not only serve as a backup to existing payment systems in the event of a crisis, but it would also reduce credit risk and liquidity risk, i.e., the danger that payment system providers would go bankrupt and run out of cash.

In that sense, the e-Rupi as a CBDC is a glimpse into a new world order for digital currencies.  The RBI has already made its plans clear to introduce CBDCs in the form of the e-Rupi during the current fiscal. An Indian CBDC is also a statement asserting the country’s thought leadership in the digital payments space.