INDIA'S CBDC INITIATIVE; A walk toward inclusivity or complexity | Rachit Joshi

INTRODUCTION

Centrally backed digital currency (CBDC) ,is are basically a digital form of fiat currency they don't have any intrinsic value same as fiat currency but are linked to the price of fiat currency,they are stabilised by the central bank and are not decentralized like normal crypto currency. Because of a sudden attraction in a cashless economy and the rise of innovation the countries are developing their CBDC and many have launched it.The Bahamas was the first country to launch there CBDC and now many countries are working toward it.CBDC provide many attractive benefits for many stakeholders like the consumer , business world and the financial sector which are ease of transaction,better payment efficiency,minimizing cash handling risk and many more.

SHAPING THE FUTURE OF FINANCIAL SYSTEM

HOW CBDC WORKS?First the central bank creates digital tokens which are then distributed to banks participating in the digital rupee pilot programme,and then these banks provide these tokens to consumers .The digital rupee tokens function similarly to banknotes or coins,and you can store them in your digital wallet.

IT'S IMPACT ON THE  FINANCIAL SYSTEM

THE NEGATIVE IMPACT :

1. Reduced Transaction Cost

 It helps reduce transaction costs by eliminating multiple intermediaries in the payment process. Traditional digital payments often pass through banks, payment gateways, and settlement systems, each charges a fee but  With CBDCs, transactions occur directly on a secure central bank-backed digital ledger, enabling faster settlements and near-zero fees

2. Lower Cross Border Cost

With CBDC we can significantly reduce these transactions by bypassing intermediary banks and enabling direct settlement between the countries.

3. Faster Transaction

It also reduces the transaction time by removing intermediaries and connecting both the parties directly during a transaction.

4. Offline Functionality

Even though right now CBDC needs a network ,internet to make transactions, the government is working on a technology which will make payment by using bluetooth ,NFC network without an active network to make small payments.

5. Inclusivity

The people can use CBDC without a bank account ,right now the government is trying to create an e-wallet and a consumer can use CBDC just with that.This makes CBDC more exclusive for people who don't have a bank account.

6. Mitigation of Concentration Risk

In the current scenario many countries have big players only 2 or 3 who are running the banking sector for example in china payment gateway are dominated by alipay and wechat pay This heavy concentration has created dependency on private platforms and raised concerns for the government about systemic risks,and CBDC can help to reduce this dependency

 THE NEGATIVE IMPACT :

1. CBDC will need the central bank to redefine its roles.

This direct payment gateway will enlarge the role of RBI in banking system they will need to create customer grievance cells and watch on the illegal activities of funding through these channels.Central banks would need to rapidly build newer capabilities in order to do so

2 Privacy Concerns

Since the central bank will have to track the transaction to reduce illegal activities they can and will track all the transactions of people and this can be a privacy concern for normal people.

3 Infrastructure Cost

The building and maintenance of infrastructure for the smooth functioning of CBDC  will require a large amount of capex and can be a burden of government deficit.

TYPES OF CBDC

1. Retail CBDC

Retail CBDC is a digital currency issued by the central bank for use by the general public, functioning like digital cash. It can be stored in a mobile wallet or card and used for everyday transactions such as shopping, bill payments, and peer-to-peer transfers

2. Wholesale CBDC

Wholesale CBDC is a type of central bank digital currency designed for use only by banks and financial institutions, not by the general public. It is mainly used for interbank transfers, cross-border settlements, and large-value transactions.

Where does India stand today?

India has made substantial progress in the CBDC (Digital Rupee or erupee) space since 2022. Legislatively, amendments to the Reserve Bank of India Act in March 2022 enabled the RBI to issue a digital currency.Pilots project were launched in november 2022 but those were wholesale CBDC which were only used by institution.India is also testing features like offline transactions, with the help of bluetooth and NFC technology.India already introduced the concept of online payment in big scale through UPI and now shifting them toward e-rupee will be the second step in the digitalization process of India. As of 2025, circulation.of the e-rupee has crossed ₹1,000 crore which is the  pilot model 

Where do we want to be  in the coming years?

In the coming years India’s vision for the e-rupee is to move further and achieve large-scale adoption across the country. The RBI aims to integrate CBDC with existing digital platforms like UPI to ensure easy acceptance and expansion . Another important goal is to explore cross-border applications, allowing faster and cheaper international remittances, which are vital for India as we are the world’s largest remittance recipient. The e-rupee is also expected to be programmable, enabling efficient distribution of government subsidies and welfare payments which were facing the problem of corruption and not reaching the beneficiary. The focus will be on developing offline functionality and simple wallet solutions so that rural and less tech-savvy populations are not left behind. With these steps, India aspires to position itself as a global leader in CBDC innovation while maintaining financial stability and data security.

Is it really inclusive or only for tech savvy people?

The major benefits of CBDC are that it can be used without having any bank account just with the help of an e wallet . It can be used to provide subsidies in local areas which were initially passed through by the gram panchayats and banks this will reduce the corruption and transaction cost and beneficiaries will receive it directly and also the government is planning to create tokens which will be used only for specified purpose which will make sure the subsidy are used for only productive purposes.Moreover by adding offline payment technology can also bridge the gap which has been a problem in areas with no network.

The challenges in CBDC inclusivity

 Even though the CBDC are performing a big task by adding people who don't have a  bank account in the digitalization process but still the problem that around 15 percent of people in India don't really have a smart phone is a problem  and this shows that e-rupee can't really replace traditional cash system and many people are still be alienated form  the whole digitalisation process. The government is working on this factor by trying to have a smart card facility or collaborating with local merchants(merchant based wallet).

THE POTENTIAL OF CBDC IN INDIA

The large volume of transaction

In terms of volume of digital payment we do around 20 Billion transactions per month through our UPI channels. By integrating e-rupee with this we can reduce or might totally remove the transaction cost from the system.

Network issues

In many areas of the countryside there is the problem of networks, especially in mountainous regions with the help of NFC and bluetooth technology integrated with the e-rupee, we can make payments without the network and internet.

Black money and corruption in subsidies

The problem of corruption in India is still very big and many times the subsidies provided by the government don't reach the beneficiaries or reach partially by this direct payment method that can be removed from the system.

CONCLUSION

CBDC has given great opportunities to countries to explore a different way to run the financial system and reduce the dependency on cash and the concentration risk of the few private players in the system,but it will change how the central bank currently works and make its position more dominant in the industry. CBDC has also made the digitalization process more inclusive by allowing people to use digital services without a bank account and give them a place in this whole digitalization process.The countries all over the world are looking forward to capitalize on this opportunity and The Bahamas was the first one to do so and now china with its one of the biggest CBDc programme is looking forward to enter the industry. In conclusion, the e-rupee has the potential to completely change the way we do payments in India. It can bring more people into the digital system, even those without a bank account, and make government subsidies more direct and less prone to corruption. With offline payment features and merchant-based wallets, even people in rural areas or places with weak networks can use it. However, there are still challenges, like the fact that many people don’t have smartphones and digital literacy is low, so the e-rupee can’t fully replace cash yet. Overall, if these issues are addressed and adoption grows, India can become a global leader in digital currency, making payments faster, cheaper, and more secure for everyone.

~Rachit Joshi