Central Bank Digital Currency

Also called: CBDC, Digital rupee, e-Rupee, e₹ · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Beyond NCERT

Meaning

Central Bank Digital Currency (CBDC), called the e₹ (digital rupee) in India, is legal tender issued by the Reserve Bank of India (RBI) in digital form. It is a direct liability of the RBI, just like a paper note. It exchanges one-to-one with cash and carries the RBI's guarantee and finality of settlement [2].

• Legal tender means money that nobody in India can refuse as payment of a debt.
• Liability means something the RBI owes to whoever holds it.
• Finality of settlement means that once a payment is made, it cannot be reversed.

It matters because it takes the RBI's monopoly of note issue (only the RBI may issue banknotes) into the digital world. It also gives India a state-backed choice against private cryptocurrencies.

• Formula (value rule): ₹1 of e₹ = ₹1 of cash

Explanation

How it works

• Central-bank money in digital form:
• A paper note is a claim on the RBI.
• An e₹ token is also a claim on the RBI.

• Only the form changes: paper becomes digital.

• Token-based: the retail e₹ is a digital token that represents legal tender [4]. Think of it as a digital copy of a note that sits in your phone wallet.

• Held in wallets from banks: people keep e₹ in digital wallets provided by banks, not in a bank account. 19 banks offer retail e₹ wallets, including SBI, ICICI Bank, HDFC Bank and Axis Bank [2].
• Banks stay the middlemen: the RBI issues the e₹, and banks hand it out to users. This keeps banks at the centre of the system.
• Features: it works with UPI QR codes. Offline use (paying without internet) and programmable use were added later.
• No interest: e₹ held in a wallet earns no interest [2], just like cash in your pocket.

Two types

Feature	Wholesale (e₹-W)	Retail (e₹-R)
Users	Banks and financial institutions	Individuals and businesses
Use	Interbank settlement (paying money between banks)	Everyday payments: P2P (person to person) and P2M (person to merchant)
Pilot start	1 November 2022	1 December 2022
First use case	Settling secondary-market G-sec trades (trades in government bonds that already exist)	Payments within a closed user group (a small, chosen set of customers and merchants)

Why issue it: motives

• Lower cost of cash:
• printing, storing and moving paper notes costs a lot;

• digital tokens avoid most of these costs.

• Programmability:

• money can be set so that it can only be spent for one purpose;
• for example, a subsidy that can be spent only on fertiliser;

• this cuts leakage in welfare transfers.

• Faster and cheaper cross-border payments.

• Sovereign alternative to crypto: people get a digital currency backed by the state. Private cryptocurrencies have no issuer who guarantees them.

Risks and how the design handles them

• Bank disintermediation (banks being cut out as the middlemen between savers and borrowers):
• people move their savings out of bank deposits and into e₹;
• banks have less money to lend;

• credit creation (banks making new loans out of deposits) weakens.

• The design's answer:

• e₹ pays no interest [2], so a bank deposit that earns interest stays more attractive for savings;

• wallets are run by banks, so banks keep their role.

• Privacy: every digital payment leaves a record, and that record could expose what users buy and whom they pay.

In India

• Issuer: the Reserve Bank of India. The e₹ is part of its currency-issue function.
• Law behind it:
• The Finance Act 2022 amended the RBI Act, 1934, so that "bank note" now includes a digital form.

• Under Section 26 of the RBI Act, 1934, RBI banknotes, including the digital e₹, are legal tender anywhere in India and are a liability of the RBI [2].

• Policy document: the RBI released its Concept Note on CBDC in October 2022 [3].

• Pilots:
• Wholesale pilot from 1 November 2022, starting with the settlement of secondary-market G-sec trades.

• Retail pilot from 1 December 2022.

• Retail pilot cities: the first phase ran in Mumbai, New Delhi, Bengaluru and Bhubaneswar, and later Chandigarh [4].

• Reach: 19 banks now offer retail e₹ wallets [2].
• On the RBI balance sheet: like currency in circulation, e₹ appears on the liabilities side, because the RBI owes its value to the holder [2].

Don't confuse with

• UPI (Unified Payments Interface): UPI is only a channel. It moves bank-deposit money, which is a liability of a commercial bank. The e₹ is money itself, and it is a liability of the RBI. UPI is run by NPCI under RBI oversight.
• Cryptocurrency (such as Bitcoin): crypto is issued privately, no one guarantees it, and it is not legal tender. The e₹ is issued by the RBI, is legal tender and carries the RBI's guarantee [2].
• Bank deposit: a deposit earns interest and is a promise made by your bank. The e₹ earns no interest [2] and is a promise made by the central bank, so it is as safe as cash.
• Wholesale e₹ vs Retail e₹: wholesale is for banks and interbank settlement (pilot started 1 Nov 2022). Retail is for people and businesses (pilot started 1 Dec 2022). Exams often swap these dates or users.

Prelims Hooks

• e₹ = legal tender + direct liability of the RBI + one-to-one with cash + finality of settlement [2].
• Section 26, RBI Act, 1934: RBI notes, including the e₹, are legal tender and an RBI liability [2]. The Finance Act 2022 amended the RBI Act so that "bank note" includes a digital form.
• Pilot dates: Wholesale on 1 Nov 2022 (secondary-market G-sec settlement). Retail on 1 Dec 2022. Concept Note released in October 2022 [3].
• Retail e₹ is token-based: a digital token that represents legal tender [4]. It is held in bank-provided wallets, and 19 banks offer them [2].
• Trap: "e₹ holdings earn interest like a savings account." Wrong. e₹ pays no interest, so that deposits do not drain out of banks [2].
• Trap: "UPI is India's CBDC." Wrong. UPI moves commercial-bank money. The e₹ is central-bank money.

Mains Points

• Benefits vs risks (GS-III):
• Benefits: lower cost of managing cash, programmable welfare transfers (money that can only go to its intended use), faster cross-border payments, and a sovereign answer to private crypto.
• Risks: bank disintermediation and loss of privacy.

• Balance: the RBI's design (no interest [2], wallets run by banks) keeps banks as the middlemen, while still giving people digital central-bank money.

• CBDC and monetary policy / credit creation (GS-III):

• if large amounts of deposits shifted into e₹, banks would have less to lend, and money creation through banks would shrink;
• this is why the retail design is deliberately cash-like and not deposit-like;

• an answer should link this to the RBI's goals of financial stability and growth.

• Digital public infrastructure and the RBI's changing role (GS-II/III):

• the RBI began in 1935 as a shareholders' bank [1] and now regulates cash, UPI/RTGS/NEFT and digital currency;
• the e₹ extends its note-issue monopoly into the digital age;
• but privacy safeguards will decide how far the public trusts and uses it.

Related concepts

• Central bank
• Currency issue monopoly
• Banker to banks
• Lender of last resort
• Bank supervision
• Economic Capital Framework
• Retail CBDC
• Wholesale CBDC

Read more

• The Reserve Bank of India: origin, functions and balance sheet