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The Reserve Bank of India (RBI), the central bank of the country, is exploring the possibility of integrating Central Bank Digital Currencies (CBDCs) with the existing digital payment infrastructure, such as the Unified Payments Interface (UPI). This move is expected to enhance the efficiency, security and inclusiveness of the digital payment system in India.

What are CBDCs and why are they important?

CBDCs are digital forms of fiat money issued by a central bank. They are different from cryptocurrencies, which are decentralized and operate on blockchain networks. CBDCs are centralized and backed by the full faith and credit of the issuing authority. CBDCs can offer several benefits, such as:

• Reducing the cost and risk of cash transactions
• Improving financial inclusion and access to digital payments
• Enhancing monetary policy transmission and financial stability
• Fostering innovation and competition in the digital economy
• Promoting cross-border payments and remittances

How RBI plans to integrate CBDCs with digital payment infrastructure?

According to Dilip Asbe, the Managing Director of the National Payments Corporation of India (NPCI), the RBI is considering integrating CBDCs with digital payment infrastructure, such as UPI, to boost its adoption. UPI is a popular and fast-growing payment system that enables users to transfer money instantly using their mobile phones. In 2023, UPI processed more than 100 billion transactions, up from 74 billion in 2022.

Asbe said that the integration of CBDCs with UPI would drive the fintech wave and create new use cases for digital payments. For instance, government institutions could leverage CBDCs to designate expenses for their employees, such as travel allowances. Another proposal by RBI Governor Shaktikanta Das is to enable offline functionality for CBDCs, which would benefit users in areas with poor internet connectivity.

What are the challenges and opportunities for CBDCs in India?

The introduction of CBDCs in India would require careful consideration of various factors, such as technology, design, legal, regulatory, and policy implications. Some of the challenges and opportunities for CBDCs in India are:

• Choosing the right technology platform that can ensure scalability, security, recoverability, programmability, and interoperability of CBDCs
• Designing the CBDCs in a way that balances the trade-off between privacy and transparency, and ensures consumer protection and grievance handling
• Assessing the impact of CBDCs on monetary policy, liquidity management, financial stability, and the banking system
• Aligning the CBDCs with the existing legal framework and addressing the issues of taxation, anti-money laundering, and data protection
• Leveraging the CBDCs to foster innovation and collaboration in the digital economy and to support the vision of a less-cash society

What are the next steps for CBDCs in India?

The RBI has recently released a concept note on CBDCs, which explains the objectives, choices, benefits, and risks of issuing a digital rupee (e₹) in India. The RBI has also announced that it will soon commence limited pilot launches of e₹ for specific use cases. The RBI has stated that its approach towards introducing e₹ is to create a digital currency that is as close as possible to a paper currency and to manage the process in a seamless manner.

The RBI has also invited feedback and suggestions from the public and stakeholders on the concept note and the pilot projects. The RBI has expressed its willingness to collaborate with other central banks and international organizations to learn from their experiences and best practices on CBDCs.