5 reasons why the Digital Rupee has not taken off

The Reserve Bank of India (RBI) introduced the digital rupee (e₹) as a Central Bank Digital Currency (CBDC) with the potential to transform the financial landscape. However, despite being launched over two years ago, it has yet to gain significant traction.

By March 31, 2024, the total value of digital currency in circulation for retail transactions was Rs 234.04 crore, up from Rs 5.70 crore a year earlier, according to RBI data. Despite this growth, the retail digital rupee (e₹-R) accounts for only a tiny fraction (0.006%) of the total banknotes in circulation. The wholesale segment has fared even worse, with its value dropping to just Rs 0.08 crore in March 2024, down from Rs 10 crore in March 2023.

CBDC or digital rupee is a form of digital currency piloted in both wholesale and retail segments in India. It functions as legal tender, just like physical currency. Here are the four main reasons why CBDC has not yet taken off:

1) Dominance of UPI

UPI (Unified Payments Interface) has become the cornerstone of digital payments in India. Its widespread adoption and cost-free transactions offer immense convenience, making it challenging for the digital rupee to find its niche. Madan Sabnavis, the Chief Economist at Bank of Baroda, emphasises that the existing systems like NEFT, RTGS and UPI make it difficult for a new payment method to gain traction. The digital rupee needs to offer distinct advantages over these well-established systems, which it currently does not.

2) Lack of convenience 

The retail digital rupee is available only in specific denominations, presenting a significant hurdle for everyday use. Users are forced to make payments in the nearest available denomination, which can be inconvenient. e₹-R comes in different denominations from 50 paise to Rs 2,000, therefore payments in decimals are not possible with a digital rupee in the retail segment.  Wholesale CBDC (e₹-W) does not have specific denominations. 

3) Privacy concerns

Digital currencies generate comprehensive transaction records, leading to data surveillance and misuse concerns. Ruchin Kumar, VP-South Asia at Futurex, highlights the importance of robust privacy protection. The critical challenge that the digital rupee must address is balancing transparency with the need to prevent illicit activities while ensuring user privacy.

4) Lack of specific use cases

For the digital rupee to succeed, it needs compelling use cases and programmability in sectors like agriculture and public welfare. According to Vijay Mani, Partner-Banking and Capital Markets Leader at Deloitte India, without clear, programmatically enabled applications, the digital rupee lacks a strong adoption incentive. Developing offline transaction capabilities and leveraging programmability for controlled spending could offer a roadmap for broader acceptance.

5) Fewer marketing initiatives

Banks have not actively promoted the digital rupee, adding to its sluggish adoption. The absence of fervent marketing, which was crucial in popularising UPI, further hampers its acceptance. UPI’s success can be largely attributed to significant marketing efforts and incentives like cashbacks, However, this level of promotion may be hard to replicate for CBDC, as banks might be reluctant to spend heavily on marketing,” adds Mani.

In summary, the digital rupee faces significant challenges due to UPI's dominance, transaction inconveniences, privacy concerns, and the lack of specific use cases. Addressing these issues will be crucial for its future success.