The flurry of excitement witnessed towards the end of last year, when the Reserve Bank of India (RBI) began testing the pilot of India’s Central Bank Digital Currency or the e-rupee for wholesale (inter-bank and large transactions) and retail segments, is missing now. The central bank’s annual report shows that ₹10.69 crore of wholesale e-rupee and ₹5.70 crore of retail e-rupee have been issued until March 2023. This amounts to a tiny fraction of the total currency in circulation of ₹33.48-lakh crore. It is however just as well that the central bank is proceeding slowly, as the jury is still out on the need for a sovereign digital currency, especially for retail users.

While around 114 countries are exploring the viability of a CBDC and many have started pilot tests, only 11 countries have launched sovereign digital currencies so far: these are mostly countries with very small population such as the Bahamas and the countries of the Eastern Caribbean Union. China is the only large country making rapid progress, intending to extend its pilot test to its entire population by the end of this calendar year. The first stage of the pilot test of India’s retail CBDC in Mumbai, New Delhi, Bengaluru and Bhubaneswar, appears to have received a tepid response. Customers appear reluctant to use e-rupee since the money transferred to the wallet does not earn interest whereas their funds can continue to earn interest from bank accounts, while linked to UPI. They also seem concerned about the absence of complete anonymity, akin to cash, with the transactions leaving a digital trail. Limited use-cases, worries over data privacy and security are other deterrents. In the wholesale CBDC segment, the pilot has been limited to settlement of secondary market transactions in G-secs.

There could be some merit in wholesale CBDC. In the aftermath of the Russia-Ukraine war, many countries are testing the feasibility of using CBDCs for cross-border payments as an alternative to the dollar and to the SWIFT messaging system. Migration of the wholesale transactions to CBDC will be easier since these are mainly accounting entries and it will also reduce settlement risk for customers. But the case for retail CBDC is rather weak. The RBI will have to decide whether it wants to introduce an alternative which will cannibalise the UPI. With sovereign digital currency not likely to impact the trading and usage in privately owned crypto assets, it is moot whether retail CBDC is required.

There are other uncertainties in launching a sovereign digital currency including the impact it will have on bank deposits and system liquidity. Many countries are providing anonymity for low-value transactions only, but this may not be acceptable to users. The RBI will have to carefully deliberate on these issues before taking the final step. Robustness of the technological infrastructure and the extent of data privacy offered will also be important in ensuring acceptance.