What is Digital Rupee: Meaning, How Does it Works | Espresso


RBI launches first pilot of digital rupee – What is it and how does it work?

November 15, 2022
RBI launches first pilot of digital rupee – What is it and how does it work?

Money is an essential aspect of any economy. With money, we undertake both big and small transactions, and we certainly cannot do away with it as the global economy is intertwined and dependent on it.

Reserve Bank of India (RBI) launched its pilot of the digital rupee on 1st November 2022 for the wholesale segment. Nine banks, namely State Bank of India, Bank of Baroda, Kotak Mahindra Bank, ICICI Bank, IDFC First Bank, HSBC, Union Bank of India, Yes Bank, and HDFC Bank, have participated in the rollout as well.

But before we dive in, it is important to know what the digital rupee is and how it works.

What is the digital rupee?

The digital rupee is called Central Bank Digital Currency (CBDC). According to the Reserve Bank, CBDC is widely defined as digitally issued legal money by a central bank. Much like sovereign paper money in a different format, it can be exchanged at par with current money and will be recognised as a means of payment, legal tender, and a secure place to keep wealth. On the balance sheet of a central bank, CBDCs would show up as liabilities.

The digital rupee claims to be different from cryptocurrencies as it provides safety, liquidity, and integrity like the physical currency provided by RBI. Additionally, it does not disturb the country's financial stability and monetary system.

How does the digital rupee work?

The CBDC model is based on the idea that it causes the least disruption and considers the nation's current monetary system. This digital currency can be separated into two categories:

  1. General purpose or retail (CBDC-R): Retail CBDC can be used by everyone, including the private sector, non-financial consumers, and businesses. Given that the Central Bank directly oversees Retail CBDC, it is believed that it can provide access to secure funds for payment and settlement.
  1. Wholesale (CBDR-W): Wholesale CBDC will only be accessible to a small number of financial institutions and is meant to settle wholesale transactions connected to interbank transfers. It can also increase the effectiveness and security of the systems that settle financial transactions.

Furthermore, the CBDC is divided into two models for its issuance and management, namely:

  1. Direct Model (Single Tier): Under this model, the Central Bank is accountable for overseeing all functions of the CBDC system, including issuing, maintaining accounts, and verifying transactions.
  1. Indirect Model (Tier Two Model): Since the Central Bank primarily deals with wholesale payments to intermediaries, all consumer claims are handled by the intermediary (banks and other service providers) under this model. This model is similar to the current physical currency management system, where banks oversee tasks like issuing notes to the general public, maintaining accounts, adhering to know-your-customer (KYC), anti-money laundering, countering the financing of terrorism (AML/CFT) checks, and transaction verification, etc.

CBDC has been launched to complement and support India's state-of-the-art payment systems, which are affordable, accessible, convenient, efficient, safe, and secure. It will also improve the country's monetary and payment systems and promote financial inclusion.


The Government of India's digital rupee is a dream project, aspiring to convert our physical currency into a digital form that aligns with India's contemporary digital and cashless economy goals. It will also reduce the settlement risk involved in a cross-border payment system.

Additionally, the digital rupee will support India's digital economy, increase financial inclusion, and improve the effectiveness of the monetary and payment systems. Not only this, but it will also reduce the operational cost of printing, storing, replacing, and transporting bank notes. 

India's digital rupee will ultimately support and bring innovation in the payment system, which is one step ahead in the global scenario.

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R. Kalyanaraman
by R. Kalyanaraman

Chief Executive Officer

I am a sales guy at heart with utmost willingness to listen to people – customers, employees, competitors et al. Nothing gets me a bigger adrenaline rush than an interesting conversation with my customer!