UPSC Prelims 2024 Q53: Digital Rupee (CBDC) Features — Explained

Consider the following statements in respect of the digital rupee:

1. It is a sovereign currency issued by the Reserve Bank of India (RBI) in alignment with its monetary policy.

2. It appears as a liability on the RBI's balance sheet.

3. It is insured against inflation by its very design.

4. It is freely convertible against commercial bank money and cash.

Which of the statements given above are correct?

  1. 1 and 2 only
  2. 1 and 3 only
  3. 2 and 4 only
  4. 1, 2 and 4

Answer: (d) 1, 2 and 4

Statement-wise explanation

  • 1: correct — The digital rupee (e₹) is a digital form of the rupee bank note, issued by the RBI. The Finance Act, 2022 amended the RBI Act, 1934 so that a 'bank note' includes notes issued in digital form, and Section 22 lets the RBI issue them. The RBI's Concept Note on CBDC (7 October 2022) describes CBDC as 'sovereign currency issued by Central Banks in alignment with their monetary policy'.
  • 2: correct — The RBI's e₹ FAQ says e₹, 'being a digital form of the ₹ bank note, is legal tender and is the liability of Reserve Bank of India'. Cash in circulation is likewise a liability of the RBI. The Concept Note lists this as a core CBDC feature: it 'appears as a liability on the central bank's balance sheet'.
  • 3: incorrect — The e₹ is just the rupee in another form. It is exchangeable at par with cash, so inflation erodes its purchasing power exactly as it erodes a paper note. It earns nothing to offset inflation either: the RBI's FAQ says 'there is no interest payable on the wallet balances', and the Concept Note recommends a non-interest-bearing CBDC to avoid pulling deposits out of banks. Nothing in its design protects it against inflation.
  • 4: correct — The Concept Note lists 'freely convertible against commercial bank money and cash' as a CBDC feature. In practice, e₹ can be loaded into a wallet from a bank account and redeemed back to it 24x7, one-for-one with the rupee. If it could not be converted freely and at par, it would not be the same rupee.

How to eliminate

You can reach the answer from basic knowledge. Start with Statement 3. No currency is protected against inflation 'by its very design'. A digital rupee is still a rupee: if prices rise, it buys less, just as a ₹100 note does. Dropping Statement 3 rules out the option that pairs 1 and 3. Statements 1 and 2 follow from what any central bank currency is. It is issued by the sovereign's monetary authority, and like cash it is that authority's liability, i.e., a claim on the RBI. Accepting Statement 1 rules out the '2 and 4 only' option. That leaves '1 and 2 only' versus '1, 2 and 4'. Ask whether a digital rupee could be the same rupee if you could not swap it one-for-one for cash or a bank deposit. It could not, so Statement 4 is true. The fact to remember: the six CBDC features in the RBI's October 2022 Concept Note. They are sovereign, an RBI liability, legal tender and a safe store of value, freely convertible to bank money and cash, usable without a bank account, and lower in cost. The statements in this question are lifted almost word for word from that list.

Know more

Central Bank Digital Currency (CBDC) is legal tender issued by a central bank in digital form. India's CBDC is the e₹ (digital rupee). The Union Budget 2022-23 announced it, and the Finance Act, 2022 amended the RBI Act, 1934 to allow 'bank notes' in digital form. The RBI released its Concept Note on 7 October 2022.

Two variants

  • e₹-W (wholesale): for banks and financial institutions. Pilot launched 1 November 2022 for settling secondary-market government securities trades. It was later widened to interbank lending.
  • e₹-R (retail): for the public. Pilot launched 1 December 2022 in a closed user group. It is a digital token in the same denominations as notes and coins, held in a bank-provided wallet.

By 31 March 2024, e₹-R in circulation stood at ₹234.04 crore (RBI Annual Report 2023-24). The retail pilot then covered 15 banks and 81 locations, and e₹ could be used through UPI QR codes. Later additions include offline payments and programmability, which lets a sponsor such as a government restrict funds to a stated purpose. This is the feature behind CBDC-based subsidy pilots.

How e₹ compares with other forms of money

Feature Cash e₹ (CBDC) Bank deposit Cryptocurrency
Issuer RBI RBI Commercial bank Private parties
Whose liability RBI RBI The bank No one
Legal tender Yes Yes No No
Earns interest No No Usually yes No
Needs bank account No No (wallet) Yes No
Value Face value At par with ₹ At par (with credit risk) Market-determined

Why non-interest-bearing? If e₹ paid interest, people could move savings out of bank deposits. That would shrink the funds banks lend out (disintermediation). Keeping e₹ cash-like limits this risk.

In the news

The RBI published its Concept Note on CBDC in October 2022 and launched the wholesale and retail e₹ pilots in November and December 2022. Through 2023-24 the pilots expanded, with UPI interoperability, more banks and new use cases. The statements in this question closely follow the 'features of CBDC' list in that Concept Note.

NCERT Concepts to Revise

  • Central Bank Digital Currency: The question is entirely about the features of India's CBDC, the e₹, and how it relates to cash and bank money.
  • Legal tender: Legal-tender status is what ties the digital rupee to the paper rupee and its value.
  • Central bank: Statements 1 and 2 turn on what a central bank issues and what appears on its balance sheet.
  • Currency issue monopoly: Explains the RBI's sole right of note issue, now extended to notes in digital form.
  • Cryptocurrency: A common mix-up: private crypto assets differ from a sovereign digital currency in issuer, backing and value.

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