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Why India’s CBDC may struggle to find adoption?

India recently launched the digital version of its domestic currency, thereby embarking on its journey with Central Bank Digital Currency (CBDC). The “Digital Rupee” or “e-Rupee” had been made available for retail and wholesale use in December 2022 with hopes of adoption among the masses. However, the past two months have sufficiently proven that the stakeholders are yet to see significant benefits of the digital rupee for interbank and institutional transactions. The factors behind the lack of appeal and consequent slow adoption of the e-rupee are numerous, most pertaining to the absence of a gap that the digital rupee could fill. 

The very first pertinent question that crops up is if we really need CBDC for enjoying digital transactions when there is so much more that has already transpired in the digitization space. Unified Payment Interface (UPI) is the foremost thing that will come to an Indian’s mind when we talk of a real-time instant consumer payments system. Various apps, such as Google Pay, BHIM, PayTM, and PhonePe among others, make digital transactions seamless between banks without disclosing account details. Availability and wide adoption of an efficient digital transaction system across the country will pose serious challenges to the value proposition of the e-Rupee. International Monetary Fund statement in November said commonalities between instant payment systems and CBDCs are too strong and can limit the use of digital currencies. 

The Reserve Bank of India (RBI) has positioned the e-Rupee as a legal tender, instead of a payment medium. Since the e-Rupee is a store of value, just like physical currency, transactions using the e-Rupee translate to money getting transferred from one wallet to another. This implies the intermediation of banks is eliminated, which is also being projected as a means to achieve higher financial inclusion. However, the caveat is that people still need to load money into their e-Rupee wallet from either a bank-linked account or a UPI app. Therefore, the unbanked population will still remain out of the ambit of currency digitization in India for some time to come. 

What is more upsetting is the lack of benefit of holding the e-Rupee. The banked population of India earns a decent interest rate on their savings account, which basically translates to making a little more money on the liquidity lying idle. However, RBI has clarified that the e-Rupee will not invite any interest whatsoever, which further erodes the appeal of holding the e-Rupee in wallets. The soaring digital payment volume in India shows that people are not much concerned about the presence or absence of banking intermediaries, owing to the speed and seamlessness of the UPI apps. 

India’s rush to launch its own CBDC may have been a consequence of the growing adoption of cryptocurrencies, which lead to the erosion of money from the country’s financial system and its deposition in a high-risk network. Nonetheless, RBI’s assumption that the e-Rupee may serve as a promising replacement for cryptocurrencies is not well grounded in reality. Investors put their money in cryptocurrencies primarily for the high returns they provide over the years and the transactional anonymity that they have as an inherent feature. Talking of the e-Rupee, it is a currency that will neither show a meteoric growth curve, nor anonymity of transactions – thereby taking away the appeal of a digital currency. 

Even for a moment, if we assume that CBDCs are a growing necessity for Indians, we need to assess if India is indeed prepared for CBDC adoption. Users of the e-Rupee will need to store the digital units in a mobile wallet. Given the digital rupee’s value proposition of final inclusion, the smartphone penetration rate in India will serve as a critical decision-influencing factor. With 66.2 percent as the smartphone penetration rate in 2022 (Statista), it is obvious that the e-Rupee won’t touch every Indian even if we assume all smartphone users shall adopt the e-Rupee. Moreover, out of all the smartphone users, only a sixth of them use UPI, as per a recent report. Digital literacy rate will play its part in influencing the adoption of e-Rupee wallets. Statistics from International Telecommunication Union (ITU) show that out of the 55 percent of Indians who have access to the internet, only 20 percent have the ability to use it. Meanwhile, a survey by the Bank of International Settlements (BIS) shows that the key motivations behind retail CBDCs are financial inclusion and payment efficiency. Therefore, for the e-Rupee to gain acceptance, it will need to be designed to be easily accessible, recognizable, and usable. Moreover, the design will need to have multilingual characteristics, given the low digital literacy across India. 

The dependence on cash for daily transactions in India is hard to ignore. Banknotes account for almost 15 percent of the money supply in India, compared to 1 percent in Sweden – a country where Riksbank has taken enough time to roll out CBDCs despite the larger preference for digital transactions. How we explain the functionality and benefit of the e-Rupee over physical cash to each citizen of India will remain an unanswered question for some time. Moreover, the wholesale segment may also not benefit immediately from the adoption of the e-Rupee, since each trade using it has to be settled individually, instead of the norm of usual bulk settlements with clearing corporations in the established interbank payment systems, once all trades have been netted off. In case e-Rupee transactions do not replace entirely cash transactions, this will add inefficiency in the banks’ accounting processes. If the trade volumes using the e-Rupee remain low, then the banks will be engrossed in more paperwork and additional labor, which takes away the appeal for banking intermediaries as well. 

Despite the hurdles posed to the e-Rupee, even if we assume that the digital currency will witness wide adoption, we need to investigate what the country may run into with the e-Rupee. The foremost concern is shared by banks, as they may see an erosion in their liquidity with banking customers preferring electronic cash. Under such circumstances, the banks may struggle to retain the low-cost, sticky deposits. Instead of sacrificing profits by shedding their loan assets, they may instead stay with less liquidity, which will leave them vulnerable to bank runs. To mitigate risks related to low liquidity, banks may increase interest rates, thereby making lending costlier. Moreover, banks use volumes of customer data to assess the best-suited interest rate. However, with e-Rupee transactions happening outside of banking intermediaries’ networks, banks will run out of real-time data to make lending easier and cheaper for people. 

We cannot ignore the demands for interoperability of the e-Rupee, since UPI has charted its success story owing to its interoperability between several payment services and mobile wallets. For the e-Rupee to be successful in India, technical interoperability with other products, such as bank accounts and e-wallets, will need to be ensured, at least for the initial phases of adoption. 

India’s venture into the CBDC realm has been quick, appreciative, and much anticipated, given its growing concerns with the volatility of cryptocurrencies, which leads to erosion of domestic currency invested in them. However, the central bank must keep conservative expectations regarding the e-Rupee, since it may take India a few years before its people realize a genuine need for the e-Rupee and the necessary infrastructure is in place. Till then, we should limit our hopes of the e-Rupee and just wait & watch. 

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Comments: (5)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 01 March, 2023, 08:261 like 1 like

Great post!

One of the benefits of CBDC is sovereign guarantee of entire balance in the CBDC account with central bank (aka FedAccount as it's dubbed in USA). IOW, balance in commercial bank account is insured only to a maximum of ₹500,000 in India (and $250K in USA) whereas that cap does not apply to FedAccount balance. Any idea why your otherwise comprehensive post has missed this benefit of CBDC?

On a side note, are you sure of "people still need to load money into their e-Rupee wallet from either a bank-linked account or a UPI app"? Why can't Employer transfer salary from its FedNow account directly to Employee's FedNow account, thereby obviating the need to involve a commercial bank account?

I keep hearing about Wholesale v. Retail CBDC. Maybe the answer to both my questions lies in that distinction but, since I didn't see mention of it in your post, I thought I'll ask you just to be sure.

Arijit Goswami
Arijit Goswami - Capgemini - Bengaluru 02 March, 2023, 02:59Be the first to give this comment the thumbs up 0 likes

Dear Mr. Swaminathan, 

Thank you for your feedback. I agree with your first point regarding cap on insurance, which I missed in my post. Regarding the 2nd point on the need for bank-linked account, currently a person can buy digital rupees from the four banks that the RBI has licensed. Therefore, to begin with the use of the digital currency, an account with those banks is required.

One of the following two methods can be used to load money into the e-Rupee wallet: 

  • Fund transfer from your linked account in the select bank  
  • Fund transfer from various UPI apps 

This implies bank acconts will be required, since.both alternatives are connected to having an account in the select banks. 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 02 March, 2023, 11:201 like 1 like

TY for the clarification.

I get that purchase of CBDC can only be made from a commercial bank account. But I was thinking more in terms of "earning" CBDC via salary and "AirDrop" that can very well happen entirely within FedAccount if employer and others are also allowed to have FedAccounts. 

Arijit Goswami
Arijit Goswami - Capgemini - Bengaluru 02 March, 2023, 15:281 like 1 like

True. For the use case you are mentioning, the transaction can happen without the need for commercial bank accounts. I agree. 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 02 March, 2023, 15:40Be the first to give this comment the thumbs up 0 likes

TY for clarifying...

Arijit Goswami

Arijit Goswami

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Capgemini

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