The Reserve Bank of India (RBI) has embarked on the introduction of the Central Bank Digital Currency (CBDC), also referred to as the Digital Rupee (e₹), as a new form of sovereign money in electronic form. The initiative draws its foundation from the Concept Note on Central Bank Digital Currency issued by the RBI on October 7, 2022 (“RBI Concept Note“). The document defines a CBDC as “legal tender issued by a central bank in a digital form, exchangeable at par with existing currency and accepted as a medium of payment, store of value and unit of account.”[1]
The Concept Note outlines key objectives: reducing the costs associated with physical cash management, enhancing the resilience and efficiency of the payments ecosystem, improving cross-border payment efficiency, and supporting financial inclusion. It also clarifies that the CBDC is distinct from private virtual currencies since it constitutes a liability of the RBI and is fully backed by the sovereign. The RBI emphasised that the Digital Rupee will coexist with, and not replace, existing modes of payment.
Types of CBDC and the RBI’s Pilot Framework
The RBI has classified the Digital Rupee into two categories: Wholesale (e₹-W) and Retail (e₹-R).
The Wholesale CBDC (e₹-W) is intended for settlement of interbank transfers and government securities transactions among regulated financial institutions. The Retail CBDC (e₹-R) is designed for the general public for person-to-person (P2P) and person-to-merchant (P2M) transactions through digital wallets managed by participating banks.
The RBI launched the wholesale pilot on November 1, 2022, to test CBDC-based settlement of secondary-market transactions in government securities[2]. Subsequently, the retail pilot commenced on December 1, 2022, covering select locations and banks[3].
Both pilots are being expanded gradually to additional banks and cities. The RBI has also indicated that forthcoming phases will examine offline functionality, programmable features, and interoperability with existing payment systems.
CBDC and UPI: A Distinction in Nature and Design
The Unified Payments Interface (UPI) and the Digital Rupee serve different functions within India’s digital payments landscape. UPI is a payment system that facilitates fund transfers between bank accounts. In contrast, the Digital Rupee is the currency itself in electronic form.
In a UPI transaction, settlement occurs through intermediary banks, whereas a CBDC transaction represents a direct transfer of central-bank money, resulting in final settlement without intermediation. The RBI’s FAQs on CBDC clarify that while UPI moves funds between bank accounts, CBDC moves value between digital wallets in the form of legal tender[4].
CBDC also offers potential features not inherent to UPI, such as offline transfer capability, programmability, and a reduction in settlement risk. Hence, UPI represents a payment mechanism; CBDC represents the monetary instrument itself.
Benefits and Policy Rationale
The RBI Concept Note (2022) identifies multiple benefits of CBDC issuance:
1. Operational efficiency: The Digital Rupee can reduce the cost of currency printing, distribution, and management while enhancing payment system efficiency.
2. Financial inclusion: CBDC can extend digital-payment access to unbanked and underbanked populations, particularly through offline or simplified interfaces.
3. Settlement efficiency: Wholesale CBDC allows real-time settlement in central-bank money, reducing counterparty and liquidity risks.
4. Innovation and programmability: Programmable CBDC can enable conditional payments and facilitate government benefit transfers with traceability and transparency.
5. Sovereign trust: As a direct liability of the central bank, CBDC maintains the stability of the monetary system in the face of private digital currencies.
6. Cross-border facilitation: CBDC may streamline international remittances and trade settlement in the long term, though cross-jurisdictional coordination remains under study.
Legal and Regulatory Framework
The legal basis for CBDC issuance was established through the Finance Act, 2022, which amended the Reserve Bank of India Act, 1934. The amendment inserted an expanded definition of “bank note” under Section 2(aiv) to include “digital form of currency.” This modification authorises the RBI to issue a digital rupee as legal tender[5].
Consequently, the Digital Rupee enjoys the same legal status as physical currency under Section 26 of the RBI Act, 1934. The RBI Concept Note affirms that this legislative change “forms the statutory foundation for CBDC issuance in India.”
The implementation of CBDC also engages several other regulatory instruments: the Payment and Settlement Systems Act, 2007, the Information Technology Act, 2000, the Prevention of Money Laundering Act, 2002, and the Digital Personal Data Protection Act, 2023, all of which govern transaction security, data protection, and compliance obligations of participating entities.
Clarifications from the RBI’s FAQs
The RBI’s FAQs on CBDC (2024) provide practical insights into how the Digital Rupee operates in pilot form. The RBI has clarified that the Digital Rupee is legal tender, exchangeable one-to-one with physical rupees, and carries the same validity for all financial obligations. Holdings of CBDC do not earn interest, mirroring the treatment of physical cash, and are stored in digital wallets issued by authorised banks or non-bank entities participating in the pilot.
Transactions are instantaneous and final, and they do not require linkage to a traditional bank account. The RBI has also stated that the CBDC architecture supports both person-to-person (P2P) and person-to-merchant (P2M) payments, similar in functionality to cash usage. Importantly, transaction data will be recorded, but the RBI has indicated that privacy principles are being actively studied to strike a balance between legitimate oversight and user confidentiality.
The FAQs further confirm that the RBI is experimenting with offline capabilities, including near-field communication (NFC)-based transfers, to enable usage in areas with limited network access. The Digital Rupee will coexist with existing payment systems, such as UPI and IMPS, ensuring continuity and interoperability within India’s digital ecosystem. Finally, the RBI has clarified that no fees or service charges will be imposed on users for CBDC transactions during the pilot phase, underscoring its intention to promote widespread adoption.
Conclusion
The introduction of the Digital Rupee marks a significant step in India’s transition toward a modern, technology-driven monetary system. The RBI’s calibrated approach—anchored in legislative amendment, pilot experimentation, and stakeholder consultation—reflects a deliberate balance between innovation and prudence. As pilots expand, the success of the CBDC initiative will depend on robust technological architecture, sound legal enforcement, effective data protection, and sustained public trust. The Digital Rupee is not merely a new payment instrument; it represents the evolution of legal tender itself in the digital age.
[1] Concept Note on Central Bank Digital Currency, Reserve Bank of India (October, 2022) https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CONCEPTNOTEACB531172E0B4DFC9A6E506C2C24FFB6.PDF?
[2] Press Release bearing number 2022-23/1118, Reserve Bank of India (October 31, 2022) https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=54616
[3] Press Release ID: 1882883, Ministry of Finance (December 12, 2022) https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=1882883#:~:text=the%20retail%20pilot.-,The%20Minister%20stated%20in%20response%20to%20another%20question%20that%20RBI,money%2C%20like%20deposits%20with%20banks.
[4] FAQs on Digital Rupee (e₹) issued by the Reserve Bank of India (January 09, 2025) https://www.rbi.org.in/commonman/English/scripts/FAQs.aspx?Id=3686&utm_source=chatgpt.com
[5] Section 139 of the Finance Act, 2022