India, the world's fifth-largest and fastest-growing economy, is embracing a digital revolution. With the growing popularity of digital payments, India has finally launched its first retail digital currency, the E-Rupee.

E-Rupee promises to revolutionize the Indian economy by providing a secure, efficient, and low-cost system for conducting online transactions as a fiat currency of the economy. It has the potential to revolutionize the way people make payments, transfer money, and conduct business in the digital age. The E-Rupee could also have far-reaching implications for the Indian banking sector and the overall economy. This article will explore the possibilities of the E-Rupee by looking at its features, benefits, and potential implications.

What is the E-Rupee?

On December 1, 2022, the Reserve Bank of India launched its first digital currency, the Central Bank Digital Currency, or the E-Rupee for the common man. It will be considered legal tender issued by the RBI and will function as the fiat currency which will be exchangeable with one- another. It will be represented by a digital token that represents a claim on the central bank and functions as the digital equivalent of a banknote that can be transferred electronically between holders. These CBDC tokens function similarly to banknotes in that they are considered bearer instruments at the point of transaction.

The cost of conducting digital transactions is significantly lower than that of conducting physical transactions, making digital currencies very cost-efficient. Digital currency also allows for greater transparency and traceability of transactions. Furthermore, digital currencies eliminate the risks associated with theft, fraud, and counterfeiting that are prevalent with physical currencies. They also provide more convenience to the public, with users being able to complete transactions from anywhere.

There will be two types of E-Rupee available in the economy:

Retail E-Rupee (launched last Thursday) is an electronic version of cash primarily aimed at retail transactions that have the potential to be used by almost everyone for payment and settlement.

Wholesale CBDC is designed for restricted access to select financial institutions. It has the potential to transform the settlement systems for financial transactions undertaken by banks in the government securities (G-Sec) segment and interbank market, and make the capital market more efficient and secure in terms of operational costs, use of collateral, and liquidity management.

Why do we need E-Rupee?

According to Srinivas Nidugondi, Chief Growth & Transformation Officer at the mobility solutions provider Comviva, Leveraging blockchain technology for the e-rupee is a stepping stone for India to become a $1 trillion digital economy. India is witnessing massive growth in digital transactions — the volume and value of UPI transactions increased by 118 per cent and more than 98 per cent respectively in Q2 2022 compared to Q2 2021. Due to restrictive actions by the bank on daily transactions, the movement of a lump sum by an individual is a bit clumsy. However, if it’s a “digital rupee” stored in your wallet, you should be able to transfer the money instantaneously without a hitch — at least in principle.

How E-Rupee will be used?

E-Rupee will be available on a certain wallet app (CBDC app) issued by the RBI, which allows you to load the balance on the wallet from your bank account. This wallet will be linked to your mobile number and will be assigned a unique ID to every user. (Currently, E-Rupee is launched as a pilot in 4 cities — Mumbai, New Delhi, Bengaluru and Bhubaneswar. This pilot includes eight banks facilitating the implementation in a closed user group.)

E-Rupee will be issued in the same denominations as paper currencies and coins and distributed through banks, i.e Rs 2000, 500, 200 etc. All transactions will be processed through a digital wallet offered by the participating banks and stored on mobile devices. In both P2P and P2M transactions, the transaction takes place between one person and another. There will be QR codes at the merchant location for P2M transactions (such as shopping). Banks will allow users to withdraw digital tokens just as they do physical cash now. In addition, It will be the same as transacting with cash without any intermediary in between. That means the money will be directly transferred from one person’s wallet to another. Unlike the UPI, where the bank works as an intermediary to execute the transaction.

What are the advantages of an E-Rupee?

• • Reducing dependence on cash: CBDC has the potential to lower the maintenance costs of physical currency. The expense of printing, transporting, storing, and distributing money can be decreased to the extent that CBDCs can replace large amounts of cash usage.

• • No Intermediary: It will provide the general public with the same features as any private virtual currency (cryptocurrency), while also lowering operational costs and eliminating any associated risks. The integrity and stability of the monetary and financial ecosystem are crucially ensured by E-Rupee, which, in contrast to crypto, has regulated intermediation and control arrangements.

• • The globalisation of Local Payment: CBDC can also enable more real-time and cost-effective extension of payment systems. It might do away with the requirement for an expensive network of correspondent banks to settle international payments. Indians working abroad will find it easier and less expensive to send money home, which will result in significant savings for India, the top recipient of remittances in the world.

What are the challenges associated with E-Rupee?

• • Security Concerns: E-Rupee can gather private user information and payment information on a large scale, which raises privacy and security concerns. This information can easily be used by malicious hands to track citizens' private businesses. The scope and scale of many security and privacy threats that already exist in the modern financial system could be significantly increased if an E-Rupee were to be implemented without the proper security protocols.

• • Financial and Digital Divide: The biggest obstacle to the success of the E-Rupee in India is the high level of digital illiteracy. In terms of internet literacy, India placed 73rd out of 120 nations in 2021. Additionally, a significant barrier to financial literacy is the lack of local language support for digital services.

• • Acceptability Concern: In India, where cash transactions are still incredibly common because of their anonymity, the traceability of E-Rupee transactions could act as a barrier to their adoption. According to the Government statistics show that during the fiscal year 2022, the number of banknotes in circulation increased by 5%.