The Reserve Bank of India will roll out the digital rupee for the wholesale segment on 1 November as part of its first pilot test programme to review and improve the currency’s functionality. The central bank will launch a similar test for the retail segment in closed user-groups of customers and merchants within a month, RBI said on Monday.
For the wholesale segment, the pilot will test the settlement of secondary market transactions in government securities. Nine banks—State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC—will participate in the pilot.
“Use of e ₹-W (digital rupee) is expected to make the inter-bank market more efficient. Settlement in central bank money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk. Other wholesale transactions and cross-border payments will be the focus of future pilots, based on learnings from this pilot,” RBI said in a press release.
In October, RBI issued a concept note on central bank digital currency (CBDC), listing the risks and benefits of introducing these currencies.
RBI said the concept note “broadly defines CBDC as the legal tender issued by a central bank in a digital form. It is akin to sovereign paper currency but takes a different form, exchangeable at par with the existing currency and shall be accepted as a medium of payment, legal tender and a safe store of value. CBDCs would appear as liability on a central bank’s balance sheet.”
A banker with a lender that’s part of the pilot said preparation for this project has been going on for some time as it needed a few specific back-end technology upgrades. “Today, a pilot transaction will happen in the secondary market transaction of government securities (G-sec). So far, whenever government securities are sold in the secondary market, the settlement happens on a T+1 basis,” said the banker cited above, requesting anonymity. In T+1, the settlement of funds and securities happens one business day after the order is executed.
The nine banks have already opened accounts with RBI to transact in CBDCs, and when a transaction happens, money will be transferred instantaneously.
“Say a bank wants to buy ₹100 crore of 10-year Gsec from another bank. They will make the trade, and the buyer bank’s digital currency account with RBI will get debited, and the seller’s account will be credited the same day. Securities will then move from RBI’s account to the buyer,” the banker added.
The concept of CBDC was first announced in the FY23 budget when finance minister Nirmala Sitharaman said RBI would roll out the digital equivalent of the rupee this fiscal. RBI has been pursuing CBDC’s launch to counter perceived threats posed by cryptocurrencies to financial stability.
Anita Mishra, managing director and head of markets and securities services at HSBC India, said the bank is looking forward to working with RBI and participating banks on this pilot and to roll out further use cases. “This will lead to real-time settlements and cost efficiency in the pilot and, over a period of time, pave the way for a range of use cases, both in-country as well as for cross-border transactions,” Mishra said.