What are the prospects and challenges of RBI's new digital currency?

RBI has outlined its issuance and implementation structure through a concept paper. Soon, it will initiate pilot testing of it.

What are the prospects and challenges of RBI's new digital currency?

An economy functions well when it maintains the people's confidence in the central bank and the government. It is an essential foundation that the currency used in the economy must always have an independent and sole existence. In the last few years, especially after the Covid-19 crisis, it has been noticed that cryptocurrencies and private digital currencies worldwide have challenged the official or legal currencies and the right of central banks to be the sole currency issuer. In recent years, an extensive section has started payments via cryptocurrencies for their transactions. In response, the central banks have begun launching the nation's official currency in digital form. The Government of India has also announced the "Digital Rupee" in the budget 2022-23. Recently, RBI has outlined its issuance and implementation structure through a concept paper. Soon, it will initiate pilot testing of it.

What is 'Digital Currency' or 'Digital Rupee'?

The reports on digital currency from IMF (International Monetary Fund), BIS (Bank for International Settlement) or RBI (Reserve Bank of India) have one common explanation that 'Digital currency is a digital conversion of physical currency, which the government legally recognizes.' Hence it can be defined as "Central Bank Digital Currency." In this sequence, India's digital rupee is not separate from the physical rupee but only varies in form.

What is the need for this between the presence of UPI, BHIM and other digital payment channels?

Ever since the Digital Rupee's announcement, there has been a consistent discussion about the need for 'Digital Rupee' when UPI, BHIM or other digital payment modes are already available. The answer is that when a customer makes payment through UPI, BHIM or other digital means, the banks are liable to maintain physical currency for every rupee transaction. Whereas digital currency will be the official currency through the central bank, for which the banks will not have the dilemma of maintaining the physical currency. With this, RBI will also be able to save thousands of crores of rupees on the printing and distribution of physical currency.

Moreover, digital transactions through UPI, BHIM, or other digital payment modes involve banking systems. In contrast, digital rupees will not use the banking systems. The digital rupee will be directly controlled and guaranteed by the central bank (RBI)

How will the Digital Rupee be issued?

RBI, in its recently released report, mentioned the major design options for issuing digital rupee. First, the digital currency will be of 2 modes - "Wholesale Digital Currency and Retail Digital Currency." Three models will be used for the issuance and management of digital currency – direct, indirect and hybrid. In the direct model, the RBI will operate the currency directly; in the indirect model, financial intermediaries will be used. In the hybrid model, both the above models will be mixed. The digital currency will be available in two forms - token-based or account based.

Along with this, privacy will also be taken care of during transactions in digital rupees. The identity of the users will be kept secret for payments up to a certain amount. However, in significant payments, the identity of the users may be known through the Digital Trail.

What are the benefits of Digital Rupee?

The "Digital Rupee" will benefit the users and the central bank. From the viewpoint of the central bank, the direct benefit of digital currency will be visible in the form of a reduction in the cost of printing and managing physical currency. Along with this, RBI will also eliminate the quality problem associated with current paper notes. Despite the growing market of crypto and private currency, RBI's digital currency will keep people's trust in the official currency of the economy. Also, it will be able to protect them from possible dangers. Along with this, consumers may also get an instant payment method which will be the best among all other available payment modes.


The digital rupee's potential as a programmable currency is an innovative feature that may shape future welfare schemes. For example, agricultural loans given by banks can be programmed to ensure that they can be used only for agricultural needs. This means that with the amount received in digital rupees under the agricultural loan/assistantships, a farmer can buy only agricultural equipment, fertilizers, seeds and other things.

What are the challenges before the "Digital Rupee"?

The innovation of digital currency is entirely new and is still in its early phase of implementation throughout the world. Therefore, there is no empirical basis for its implementation. Yes, China implemented its digital currency two years ago, but India cannot make its policy on the information of a suspicious nation like China. Therefore, the biggest challenge before the RBI is how it establishes the digital rupee among its citizen, considering the low financial literacy. One of the challenges in this is to implement an offline digital rupee. Even today, a large population remains out of reach of the Internet, while it is an essential dimension of this new currency. Therefore, the RBI will have to take concrete measures to ensure the offline availability of the digital rupee because the essence of the currency depicts that it must be accessible to all citizens.


Nobel laureate in economics 'James Tobin' said that the 'Federal Reserve Bank' must ensure easy and secure currency availability to the people in America. The present time is of digital currency. It is the responsibility of the government and RBI to make a safe, easy and fast digital rupee and ensure its availability to the people. The people have aroused a demand for this digital rupee.

(The author is a research scholar at Rajeev Gandhi Institute of Petroleum Technology and President at Finance and Economic Think Council. Views are personal.)