A Central Bank Digital Currency (CBDC) is a concept representing the digital form of a country's fiat currency, issued and backed by the central bank. In India, this is called the Digital Rupee or e₹, which is a direct liability of the Reserve Bank of India (RBI), just like physical cash. The e₹ is a sovereign currency, exchangeable one-to-one with the physical Rupee, and serves as a legal tender.
The concept gained momentum globally as central banks sought to counter the rise of private cryptocurrencies and reduce the cost of managing physical cash. The Indian government announced the launch of the CBDC from the Financial Year 2022-23 in the Union Budget on February 1, 2022. The problem it solves is providing the public with a digital currency that has the safety and stability of central bank money, unlike volatile private digital assets.
The e₹ works through a wallet-based model, where users hold the digital currency in an e₹ wallet provided by participating banks on their mobile devices. The RBI is piloting two versions: the Retail CBDC (e₹-R) for everyday transactions by the public, and the Wholesale CBDC (e₹-W) for inter-bank settlements. Transactions are settled instantly on the central bank's ledger, offering finality. A key feature is programmability, which allows the government to issue funds, such as subsidies, that can be restricted for use only on specific goods or at approved merchants.
The legal basis for the e₹ connects to the Reserve Bank of India Act, 1934. The Act was amended through the Finance Act, 2022, which added the digital form of a banknote to the meaning of 'bank note,' thereby empowering the RBI to issue the digital currency under Section 22 of the RBI Act. The e₹ coexists with the Unified Payments Interface (UPI), but unlike UPI, which is a payment system moving commercial bank money, the e₹ is the actual digital money and a direct claim on the RBI.
The framework has changed recently with the Finance Act, 2022 amending the RBI Act, 1934 to legally enable the issuance of the digital form of the Rupee. The RBI launched the pilot for the Wholesale CBDC on November 1, 2022, followed by the pilot for the Retail CBDC on December 1, 2022. The core function of the RBI as the sole issuer of currency, as per Section 22 of the RBI Act, remains the same, but the form of the currency has been expanded to include digital.