- India’s Reserve Bank (RBI) is expanding its wholesale digital rupee trials to include call money markets, while also integrating UPI QR codes in its retail CBDC apps for increased usability.
- Unlike other countries, India is running both wholesale and retail Central Bank Digital Currency (CBDC) pilots nearly concurrently.
The Dual-Pronged Strategy of India’s CBDC Initiative
In an unparalleled move, India’s Reserve Bank (RBI) is running both wholesale and retail Central Bank Digital Currency (CBDC) pilots nearly in tandem. A recent update indicates that the RBI is extending its wholesale digital rupee trials to encompass the call money markets—short-term markets where banks lend and borrow from each other on a one-day basis.
Wholesale CBDC: Navigating the Nuances of Interbank Lending
Wholesale CBDC trials started with the RBI utilizing digital rupees for government bond transactions. However, despite the initial traction, these transactions waned by February. The aim now is to penetrate the interbank borrowing arena. The rationale is robust: experimenting with technology is significantly more streamlined in the wholesale sphere since the participants are already interconnected within the financial ecosystem.
Interestingly, wholesale CBDCs exhibit technological merits for intraday transactions, such as intraday repos and FX swaps. Instant settlements are one of the key advantages. For instance, if a bank has substantial payments scheduled for 9 am, the treasury department could lend out surplus funds overnight with a stipulation that the money must be returned by 8:45 am. The technology allows for such tight payment windows, minimizing risk and optimizing liquidity management.
Retail CBDC: Usability Skyrockets with UPI Integration
On the retail side, the digital rupee is experiencing a significant usability uplift. Seven banks have integrated UPI (Unified Payments Interface) QR codes into their CBDC applications. Given UPI’s widespread popularity as an instantaneous payment system in India, this integration vastly enhances the practicality of using CBDCs in retail transactions.
In terms of timeline, India is approximately nine months into its CBDC pilot. To put this into a global context, China began its CBDC trial in April 2020 and is only now starting to introduce aggregated QR codes that amalgamate various payment apps, albeit none are government-owned.
While each country’s CBDC approach varies, India’s ambitious and dual-faceted strategy, augmented by technological innovation, sets an intriguing precedent in the ever-evolving landscape of digital currencies.