By – Adityaa Kondury
Abstract
This article takes a look at how India’s retail e-Rupee pilot has successfully integrated 17 participating banks with over 60 lakh registered users, and INR 1,016 crore in circulation efficiently. It argues how this is a big achievement in the space of Programmable CBDCs (Central Bank Digital Currency), which is embedding smart contract logic directly into CBDCs and wallets. Thus, the article analyses how despite these improvements, it is important to understand that if digital central bank money becomes an attractive substitute for commercial bank deposits, it could threaten to drain low-cost funding from the banking sector, reduce credit creation, and increase financial stability risks.
Introduction : Unbundling the Monetary Architecture
India’s retail payment ecosystem is dominated by the Unified Payments Interface (UPI), which has processed over INR 29,02,988.05 Cr. in transactions in April 2026. While UPI offers an instant convenient and digital clearing system, it still remains a payment gateway and a layer built on traditional commercial bank money. In contrast to UPI, the e-Rupee which was introduced in wholesale and retail pilots by the Reserve Bank of India (RBI), provides completely different architecture, with digital legal tender and immediate settlement finality.
The RBI can leverage smart-contract logic to separate money’s store-of-value function from its more widely used medium-of-exchange function, potentially enhancing financial system efficiency. This contract can further be detailed based on various factors such as geographical constraints, merchant categories, or expiration windows. These programs need not be embedded in the entire system, but can be microprogrammed into individual tokens, allowing for unlimited customisation. This would help the RBI use digital money as a precise instrument for money market and monetary operations, which can not only function with surgical precision but also protect the monetary sovereignty of the nation against private cryptocurrencies and foreign stablecoins.
Zooming out at the macro impact, India being the largest recipient of remittances, absorbs over USD 120 billion in annual remittances. With this proposed Cross-border CBDC settlement, remittance friction costs could reduce from 4.5%–6.2% to 0.5%–1.5%, saving households nearly USD 3.3 billion annually.
The case for programmable CBDCs
The primary rationale for programmable sovereign money is to close the structural frictions created within the traditional monetary transmission. Using the case study for India as an example, changes in the repo rate by RBI do not immediately alter market lending rates, in fact, there is a 6 to 9 month transmission lag before repo rates influence commercial bank lending rates. Moreover, commercial banks frequently delay adjusting deposit and lending rates due to their rigid balance-sheet structures and liability management constraints, these combine to significantly delay in monetary policy transmission and its true impact.
Apart from these concerns, the distribution of physical currency also imposes significant operational costs, with RBI note printing costs reaching INR 6372.8 Cr in FY25, marking a 25% rise. As former RBI Governor Shaktikanta Das mentioned, how the programmability feature of CBDC could serve as a key enabler of inclusion. Also, this kind of e-Rupee could enable direct liquidity injections into targeted productive sectors, bypassing commercial bank intermediation delays and preventing policy stimulus from leaking into asset price inflation.
The upside of programmable CBDCs:
For priority sectors, programmable tokens will ensure policy changes and spending achieves its intended outcome nullifying the crowding out effect. For example, the fertiliser subsidy would be programmed to strictly spend at authorised input dealers. As mentioned by Das in his speech, it could be used by farmers to receive “purpose bound money” for generation of carbon credits. This would help reduce the fiscal leakage. As for enterprise credit, these smart contracts can automate “Delivery versus Payment” (DvP) settlement enabling better efficiencies and preventing bottlenecks. Moreover, the BIS Annual Economic Report notes that linking e-currency tokens to electronic bills can release credit automatically upon proof of delivery, lowering default risk premiums.
The pitfalls of programmable CBDCs
The primary macro-financial risk posed by retail CBDC is commercial bank disintermediation. Indian commercial banks rely on public deposits for 63% of their funding base. If households as a large scale shift savings into risk-free e-Rupee wallets, commercial bank balance would face a massive liquidity crisis as their structural funding erodes. With fluctuating money demand, central bank liquidity forecasting would be compromised and this would force central banks to increase reserve requirements, forcing commercial banks to hold larger liquidity reserves, thus reducing the amount they can use to loan and generate revenue.
Additionally for the RBI, its reserves could expand into broader credit categories through the monetary multiplier, thus losing low-cost deposits and forcing banks to raise expensive wholesale capital.
Global insight on Programmable CBDCs
Global CBDC deployments have demonstrated that policy design dictates monetary and stability outcomes, take for example, ECB’s Digital Euro pilot (EUR 1.5 billion in Q3 2024), this excluded programmability to protect bank funding. However, their stress testing revealed that an unconstrained full scale launch caused a significant deposit drain which prompted an individual holding cap. Despite these challenges, 25%–30% of surveyed customers expressed a willingness to move bank deposits into digital euros during stress events.
China’s e-CNY (Chinese Yuan) pilot is the largest retail deployment, processing over CNY 1.9 trillion across 23 cities. Specific cities like Shenzhen, Chengdu, and Suzhou have gone a step ahead to issue time-bound e-CNY called “Red Envelopes” during municipal stimulus drives and paid public transit subsidies. These red envelopes carry an expiration date, forcing people into rapid spending, which accelerates the velocity of money without creating monetary inflation.
Brazil, on the other hand, had launched 2024 DREX programmable pilot (BRL 500 million across 150,000 users), which has seen off-program spending misuse reduce with a reduction in administrative costs.
In contrast to these successful pilots, Nigeria’s eNaira has struggled with under 0.5% adoption, as it failed to clearly distinguish its purpose over existing mobile banking apps. These cases show that India’s e-Rupee must offer tangible functional utility, while maintaining UPI interoperability, and enforcing strict holding limits to prevent speculative transfers that derail monetary policy transmission.
Blueprint for Programmable e-Rupee
To tailor programmable CBDC to India’s monetary framework, it should ensure that holding caps are calibrated to protect Public Sector Banks (PSBs) and regional banks that rely heavily on low-cost CASA (Current Account Savings Account) deposits, it should also cap operational wallets for Individuals, retail and merchants. Second and the foremost, a non-remunerated asset structure is to be formed, which is essential in preserving the Liquidity Adjustment Facility (LAF). If CBDC ever carried interest, it would interfere with the Standing Deposit Facility (SDF) rate and distort overnight money market signals.
Conclusion
India’s programmable e-Rupee pilot marks a major evolution and a shift towards global central bank standards of going beyond just CBDCs. The programmable one offers direct monetary policy transmission, relatively faster money velocity, efficient,and directed public transfers for specific purpose or policy. However, it is to be noted that an unconstrained digital cash could pose a massive risk in pulling savings out of commercial banks, which could significantly reduce loan availability and create financial stability concerns. To harvest these efficiency gains safely and to maximise the purpose of programmable e-Rupe, RBI India must enforce strict holding limits and zero interest rates, while implementing lessons learnt from China, Brazil and Nigeria’s programmable CBDC project. At the end, the e-Rupee is best deployed as a complementary, precision-focused instrument that has interoperability with the existing UPI, which can help strengthen monetary policy without destabilising the commercial banking ecosystem.
About the Author
Adityaa Kondury is a third year Economics student at Jindal School of Government and Public Policy (JSGP) and a member of the Economics and Finance cluster of Nickeled & Dimed. He is an avid reader of the global markets and is passionate in exploring the realm of financial markets, investing and international economics. He also has a keen interest in geopolitics, risk analytics, CBDCs and cryptocurrency.