During monetary policy review, Reserve Bank of India (RBI) Governor Shaktikanta Das on February 8 proposed additional use cases for central bank digital currency (CBDC) pilot projects.
To make it attractive and increase the adoption of CBDC, Das said that the digital currency would be programmed to help cater to specific end uses and also make it usable in areas with poor or no internet connectivity.
If you are aware of this development, here is an explainer to understand the innovations the RBI has brought in.
To begin with, what was the announcement?
As per the policy document, the latest additions proposed by the RBI permit users like government agencies to ensure that payments are made for defined benefits.
Besides, companies will also be allowed programme-specified expenses like business travel for their employees. Additional features like validity period or geographical areas within which CDBC may be used can also be programmed.
The central bank also proposed introducing offline functionality in CBDC-R (CBDC retail which applies to, among other things, individuals and private entities, as opposed to CBDC-W or wholesale, which is limited to financial institutions) to enable transactions in areas with poor connectivity.
Also read: CBDC: Has RBI monetary policy injected a new life into the digital currency?
What is the reason behind the RBI move?
The RBI said programmability will facilitate transactions for specific/targeted purposes, while offline functionality will enable these transactions in areas with poor or limited access to the internet.
As per experts, programmability and offline functionality in CBDC-R promise speed, security and convenience for users.
“Faster transactions, both online and offline, will be possible with programmable features and secure offline options. This visionary move empowers users with flexibility and ease, boosting India's fintech ecosystem,” said Rahul Jain, chief financial officer, NTT DATA Payment Services India.
Benefit of offline pilot
The ability to conduct offline transactions will open new possibilities for financial inclusion, bridging the gap for those in remote or underserved regions. Industry experts said this will allow the central bank to test the currency in offline mode and may help in its full-fledged launch.
SBI Research in its Ecowrap report said introducing an offline functionality that enables transactions in areas with limited internet connectivity could be a game changer as on-boarding people from fringe areas into the CBDC architecture would enhance its acceptability exponentially.
What does the CBDC pilot currently offer?
The CBDC-R pilot currently enables person-to-person (P2P) and person-to-merchant (P2M) transactions using digital rupee wallets provided by banks that are part of the pilot programme.
Some of these banks are State Bank of India, ICICI Bank, Yes Bank, IDFC First Bank, Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank.
Also read: RBI proposes additional use cases for CBDC pilot
Is this the first time offline and programmability of CBDC has been mentioned?
Not really. On July 11, 2023, RBI Deputy Governor T. Rabi Sankar in his speech mentioned the possibilities the digital currency could open up.
“The digital form of currency brings along with it multiple possibilities which can bring innovation and efficiency such as features of offline, programmability, cross border-transactions in current systems and may create altogether new frameworks for financial system to operate in,” Sankar said during his keynote address at the Moneycontrol India Startup Conclave in Bengaluru.
The RBI deputy governor also said like in the case of the unified payments interface, the country will witness a raft of innovation on this tokenised form of money in the days to come.
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