RBI's Digital Rupee: Bridging the Gap Between CBDC and UPI

RBI's Digital Rupee facilitates fast and efficient transactions, aiming to enhance financial inclusion while providing a secure and regulated digital alternative to physical cash.

In a significant development, RBI has announced the interoperability of QR codes for UPI and the Central Bank Digital Currency for retail ("CBDC-R") as part of its ongoing E-rupee pilot project. This move is designed to further enhance the adoption and acceptance of both UPI and CBDC-R, streamlining the payment process for both consumers and merchants.

Both UPI payments and the use of CBDC-R can be initiated by scanning a QR code that will fetch the recipient's details. The novelty lies in the fact that, with this interoperability, the same QR code can be used to make payments to either a merchant's bank account linked to UPI or the merchant's CBDC-R wallet.

Several banks, including Axis Bank, SBI, Kotak Mahindra Bank, and HDFC Bank, have already introduced UPI interoperability in their Digital Rupee applications, showing commitment to simplifying transactions and improving financial inclusion. National Payments Corporation of India (“NPCI”) has also issued instructions[1] to facilitate this initiative, ensuring that both CBDC-R and UPI users can enjoy a seamless and interconnected payment experience.

As per the NPCI instructions, members shall implement the following for enabling interoperability and acceptance of UPI QR Codes for Digital Rupee transactions:

1. The Bank Apps enabling Digital Rupee transactions shall be allowed only for QR code-based merchant payments (P2M or P2PM). No transactions should be allowed for the P2P segment.
2. Digital Rupee transactions on UPI QR Code shall be initiated/identified with purpose code 92 and via Digital Rupee (Wallet id - @dr<bankname>) handle only.
3. In case of refunds pertaining to such interoperable transactions on UPI QR, the same shall be initiated only via Unified Dispute and Issue Resolution (UDIR) APIs. If the acquiring entity uses any other channel for processing 'refund', liability of such transactions shall be with the acquiring entity.
4. Existing NPCI switching fees for UPI merchant payments (P2M or P2PM) transactions shall be applicable for the aforesaid transactions.
5. Existing UPI Limits shall apply for such transactions.
6. Existing UPI settlement process and associated guidelines[2] will be applicable for such transactions.

In conclusion, RBI's efforts to bridge the gap between CBDC and UPI QR codes demonstrate the Central Bank's commitment to modernizing India's payment ecosystem. It opens new avenues for the use of the Digital Rupee and strengthens its position as a viable alternative to traditional cash. (Compliance by November 30, 2023)

[1] https://www.npci.org.in/PDF/npci/upi/circular/2023/UPI-OC-170-RBI's-Digital-Rupee-CBDC-and-UPI-Interoperability.pdf

[2] https://www.npci.org.in/PDF/npci/others/UPI-Settlement-Process.pdf