Question: Central Bank Digital Currency (CBDC) in India — design, significance, and governance challenges of the Digital Rupee
Introduction
The Reserve Bank of India's Digital Rupee (e₹) represents a sovereign-backed digital money instrument that seeks to modernise payment infrastructure while preserving central bank control over monetary sovereignty.
Body
1. Legal Status and Balance Sheet Treatment
The e₹ is legal tender issued by the RBI, carrying the same sovereign guarantee as physical currency notes. Critically, it appears as a liability on the RBI's balance sheet — mirroring banknotes — distinguishing it from private cryptocurrencies that carry no such backing. This design preserves the integrity of the monetary base.
2. Retail vs. Wholesale Architecture
The wholesale CBDC (e₹-W) targets interbank settlements and financial market transactions, improving settlement efficiency and reducing counterparty risk. The retail CBDC (e₹-R) is designed for public use and, in wallet-based models, can enable transactions without a traditional bank account, extending financial access to underserved populations.
3. Financial Inclusion and Programmability
Offline-capable wallet models allow the e₹-R to function in low-connectivity areas, potentially deepening last-mile financial inclusion beyond what conventional banking infrastructure achieves. Programmability features could enable targeted subsidy disbursement with end-use conditions, strengthening direct benefit transfer mechanisms.
4. Governance and Privacy Challenges
CBDC introduces tension between transaction traceability — useful for anti-money laundering compliance — and citizens' reasonable expectation of financial privacy. Calibrating anonymity thresholds, preventing disintermediation of commercial banks, and ensuring cybersecurity resilience are unresolved design challenges requiring clear regulatory frameworks.
Conclusion
The Digital Rupee's success hinges on balancing monetary control with user privacy, and efficiency gains with financial stability. Phased pilots must generate evidence-based policy before full-scale deployment reshapes India's payment ecosystem.
Word count: 233
PYQ 2024
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?
PYQ
Consider the following statements regarding the potential macroeconomic risks of introducing a retail CBDC:
1. A CBDC could trigger rapid 'digital bank runs' as citizens can instantly convert bank deposits to CBDC in times of financial stress.
2. Wide adoption of CBDC would necessarily increase the money supply (M1) in the economy.
3. CBDC could reduce the profitability of commercial banks by drawing deposits away from them.
Which of the statements given above is/are correct?
PYQ
Consider the following statements regarding Central Bank Digital Currency (CBDC) in India:
1. The digital rupee (e₹) is issued by the Reserve Bank of India and is a legal tender.
2. Unlike physical currency, the digital rupee does not appear on RBI's balance sheet.
3. The wholesale CBDC (e₹-W) is intended primarily for interbank settlements.
4. Retail CBDC (e₹-R) can be held by individuals and businesses.
Which of the statements given above are correct?
PYQ
The Reserve Bank of India launched the pilot for wholesale CBDC (e₹-W) in November 2022. Which of the following was the primary use case designated for this pilot?
PYQ
Consider the following statements about CBDC and financial inclusion:
1. CBDC can potentially bring unbanked populations into the formal financial system without requiring a traditional bank account.
2. Offline functionality of CBDC makes it useful in areas with limited internet connectivity.
3. CBDC necessarily requires a smartphone for transactions.
Which of the statements given above are correct?