What is Digital Rupee in India, and how does it work?

Apr 05, 2024

Our country has seen the evolution of money in many forms, from being a commodity exchange to printed papers. The newest in town is the introduction of the Digital Rupee India.

RBI has already been very supportive of digital payment applications and even launched its UPI medium, BHIM. Their newest venture is the Digital Rupee, which the country’s Finance Minister has coined for the first time in the budget presentation.

Later the same year, it was officially introduced with the list of pilot banks selected for the project. The impact of this new change in monetary representation is still being determined, as it’s not yet open to the public.

What is Digital Rupee in India?

The Digital Rupee, or E-Rupee, is the electronic form of Indian currency authorized and issued by any central bank. RBI describes this as a legal tender in digital format.

Consumers can use this currency in contactless online transactions. It’s also convertible, where customers can get the same value in cash in authorized banks. 

Right now, nine banks have been chosen by the RBI to roll out the pilot project, including HDFC, ICICI Bank, Kotak Mahindra, and SBI. The main reason for this is the increasing fund requirements to print physical money.

In functions, the Digital Rupee may appear similar to cryptocurrency. However, the central government was always against the latter due to its financial stability. 

How is cryptocurrency different from the Digital Rupee?

A cryptocurrency is a digital currency not dependent on or controlled by any central bank or government bodies. It works based on cryptography and blockchain technology. Cryptocurrency transfers are not regulated.

A cryptocurrency user can remain anonymous while making transactions. But the RBI will fully control and facilitate the Digital Rupee.

Also, RBI has promised protection against hackers that even cryptocurrency cannot guarantee, which one can hack into with quantum computing.

Note that one cannot compare cryptocurrency and the Digital Rupee as both serve different purposes. Cryptocurrencies are also a form of digital assets. However, a Digital Rupee can only be used for transactions.

Understanding what is CBDC

CBDC is the common term used worldwide that expands into Central Bank Digital Currency. Many countries have successfully implemented CBDC, whose value is connected to their native fiat currency value.

To know what is CBDC, let’s look into the definition of fiat currency. Fiat currency is like a legal tender that can be used in exchange for services or products and is not backed by the value of gold or silver.

Initially, fiat currencies were issued in the form of coins and currencies. With digital technologies came a payment revolution where customers started relying on digital entities for money transfers.

Why RBI wants to introduce CBDC in India?

There are reasons why cryptocurrencies didn’t earn much support from RBI. As cryptocurrency is a decentralized digital currency in India, RBI cannot regulate or see how much is transferred in bitcoins or who made the transfer.

This can invite trouble in the form of illegal money transfer activities or money laundering. But in ideal worlds, cryptocurrency is everything that RBI wanted to benefit from.

In the boom of online commerce and digital transfers, RBI wanted to find a solution that strengthens the Indian digital economy. This led to the Digital Rupee India, which can be regulated and offer the good parts of cryptocurrency.

The successful implementation of the Digital Rupee will further reduce the dependency on physical currency, saving money for the government.

They won’t incur printing costs, logistics, and distribution and will save cash from damages. People will be able to cut transaction costs during online transactions and make payments at higher efficiency. 

Types of CBDC

Depending on its use, it’s classified into two types.


Retail CBDC is the digital currency available for all users (public). It allows people not to carry physical cash and rely on government-backed digital currencies.


Wholesale CBDC is only available for selected financial institutions like the country's banks and is restricted to public use. Wholesale CDBC can help them make transactions faster with the help of blockchain technology and automation.

What banks are part of it?

The State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank, and HSBC are the nine banks part of the pilot project.

What are CBDC's advantages over other digital payments system

The burning question of Indians who are already accustomed to digital payment platforms is how superior the Digital Rupee is to other available systems in the market.

The Central Bank Digital Currency India is going to implement has the following advantages. 

1. Indian buyers can pay without middlemen

The Digital Rupee cuts the need to have intermediate banks and payment facilitating systems during domestic and international transactions. Imagine having a digital payment system where you directly hand the cash over to the recipient.

That’s how CBDC works. The central bank takes entire liability for the transaction, handles KYC, and transacts the payment from the sender to the beneficiary, leaving no job for intermediaries.

2. Lower transaction cost

The remittance fee itself accounts for 7 to 10% of the transaction amount in India right now. On top of that, private payment institutions charge more transaction and hidden fees.

This is particularly difficult for businesses that interact globally and send international remittances. CBDC supposedly will reduce up to 2 to 3% of this fee and make both domestic and cross-border transactions go down at lower costs.

If the central banks are made not to charge any transaction fees, the incurred transaction cost will be much lower than cards and digital payment systems. 

3. Real-time account settlements

The CBDC India can instantly transfer funds and make real-time account settlements, unlike digital payment systems that take time.

As it doesn’t have intermediate banks involved, the time taken for payment processing is too low. You can compare this to how UPI works, except that UPI is operated based on money in the bank account.

4. No need to set up a bank account to transact with a Digital Rupee

To send or receive money through digital payment systems, you will need a bank account first. That’s how you qualify to send money digitally to anyone within the country or outside.

This also applies to credit card transactions. But CBDC India lets you transfer money without any bank account. This will be a great initiative to promote digital banking products in places with low or zero banking facilities.

5. Fast cross-border transactions

Depending on the payment mode used, international transactions can take from 2 days to one week with limited updates. Faster foreign remittances at affordable pricing have been a requirement for businesses for a very long time.

Furthermore, personal remittances related to higher studies, tourism, donations, and online commerce trading will get benefitted too. 


The Digital Rupee will help Indian payers send money to other countries in shorter durations as if they make transactions in dollars in real-time. 

6. Only RBI’s Digital Rupee will be free from tax regulations

The Indian government has already enforced 30% taxation on any virtual assets owned by the citizens. This applies to cryptocurrencies, bitcoins, Litecoin, XRP, and more. This heavy taxation burden won’t be there for the Digital Rupee RBI releases. 

Along with these advantages, CBDC can also help reduce the printing and storage costs of physical cash and our dependency on it.

What will be the impact of the Digital Rupee in India

The implementation of the Digital Rupee affects different groups of people in different ways. How does this new product impact our economy, businesses, and consumers?

Impact on the economy of India

After all, churning out physical cash is not feasible in the long run, and it cannot handle increased consumeristic activities. That’s where digital payment systems and digital currencies come into play.

This year alone, around USD 4800 crores have been spent on manufacturing paper money, storing, and safely transferring them. RBI hopes to prevent this cost with the advent of digital currency options.


The safe co-existence of the Digital Rupee, physical cash, and other digital payment apps can boost the Indian economy while facilitating multiple options and opportunities for individual and business payments.

Digital Rupee, India, will also create a safe and stable payment environment with necessary controls and regulations, unlike cryptocurrencies.

Impact on businesses

Businesses have another payment option to experiment with now. For them, the primary consideration is a cost-effective and fast transfer system. 


Right now, almost every business transaction happens online. They no longer prefer cash as a safe transaction option. And that’s because of the following reasons.

• Limited facilities to transfer money to a supplier from a different location

• Cash can be damaged, torn, or stolen

• Accounting will be more complicated than before. Counting, processing, and storing cash need separate attention

• Vulnerable to money laundering and other fraudulent activities


The usage of the Digital Rupee can overcome all these drawbacks. Even if a digital currency gets hacked, it’s possible to identify the source of the crime.

Unlike cash payments that are harder to track, digital currencies can be tracked and centrally managed. It also helps in maintaining accurate accounting records without heavy data entry tasks.

Hence, you can minimize risks related to fraud and settlements. Settlement risk is when you can’t transfer instantaneously and eventually lose track of the money.

Similar to how BHIM UPI inflated small and local businesses sales, you can expect another digital payment boom on its way for businesses.

Impact on individuals

RBI is not planning to stop or make changes in the existing financial ecosystem as it’s already doing well than expected. UPI payments alone have risen to 118% this year, creating a digital boom.

Now the Digital Rupee will be another feather in the cap and provide customers with an additional money transfer mode. It’s assumed that the Digital Rupee will be available in their digital payment apps as another option.


Customers without bank accounts and financial knowledge can send and receive money through Digital Rupees. Employees can receive a part of their salary through digital cash.

There are many use cases like this. The impact on individuals is still not fully apparent as the project is on trial. 

The roadmap ahead: Traditional rupee will get replaced by the Digital Rupee?

After witnessing a demonetization and increase in cash demand, RBI clearly will not replace physical cash but let that co-exist with digital options. Their motto is to introduce a safe replacement for private digital currencies that they can regulate.

When curtains are fully raised for the Digital Rupee, India will have its own CBDC, which can be more securer than crypto and other digital currencies. 

Though the Digital Rupee promises faster operations, scalability, liquidity, and anonymity, this replacing traditional payment mediums like cash and card is still a big question.

Businesses and urban and technically wise customers will accept and utilize CBDC. Still, it can take time to establish across the wide masses who need to be used to digital banking products.

Suggested read: Key fintech industry trends for 2023 in India

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