How RBI's disintermediation guardrails have become a permanent ceiling on India's CBDC.
By Aniket Kshirsagar
India’s retail CBDC (Central bank digital currency), the e-rupee (e₹), has been in and out of the spotlight since its active pilot testing began in December 2022. It has 6-7 million users, 19 participating banks, and the RBI’s full institutional backing.
Yet it operates under a ₹10,000 per-transaction cap and a ₹50,000 daily limit, and is non-interest-bearing at the same time, which is the product of a theoretical policy contradiction.
The RBI has simultaneously tried to build a widely usable digital currency and to ensure that it is never widely used enough to threaten the banking system. Until that contradiction is named and resolved through a published framework, the e-rupee will not achieve the retail scale, wherein the infrastructural, technological, and disruption costs of a digital currency can be justified.
Disintermediation concerns
The central bank, in its concept note on CBDC in 2022, expressed concerns over the disintermediation of the banking sector if India’s digital currency is renumerated, i.e., if it offers an interest rate.
In the context of an Indian CBDC, disintermediation means migration of household bank deposits into CBDC wallets, culminating in banks losing their primary funding source, their credit creation capacity shrinking, and a rise in lending rates.
The shortage of funds from the household sector can further incentivize banks to raise capital from riskier sources like unstable security markets, which is undesirable after a certain percentage.
The 2022 concept note from the RBI explicitly acknowledged this risk and proposed these relevant mitigation instruments: holding/transaction limits and remuneration policy.
Theoretically, holding/transaction limits would be efficient instruments of preventing disintermediation if the e₹ was remunerated. If India's digital currency were to offer an interest rate, the risk of a bank run during economic downturns (or expected downturns) would increase. Hence, a non-interest-bearing CBDC is in alignment with the central bank’s expected impact of the e-rupee.
The discrepancy, though, has occurred due to India’s simultaneous deployment of both measures. The e-rupee is non-interest-bearing (remuneration policy) while also being capped at ₹10,000 per transaction as noted earlier.
What the limits actually foreclose
The limits make a CBDC actively unattractive for the retail agents in an economy that has a strong presence of the Unified Payments Interface (UPI). A standard UPI transaction cap is ₹1 lakh per transaction for most bank accounts; hospital and education payments were raised to ₹5 lakh in recent MPC cycles.
The e-rupee's ₹10,000 cap is one-tenth of the standard UPI ceiling. At ₹10,000 per transaction, the e-rupee cannot be used for rent payments, school fee payments, most utility bills, and the bulk of agricultural input purchases that the RBI's own programmability pilots are targeting.
The ₹1 lakh storage cap means an e-rupee wallet cannot hold more than a typical monthly salary for a mid-income household, making it structurally a small-change instrument.
Adoption data confirms this, as circulation of ₹1,016 crore across 7 million users implies an average wallet balance of roughly ₹1,450, which is well below even the ₹10,000 transaction cap, suggesting users treat it as a trial instrument rather than a functional wallet.
Framework absence
Disintermediation is a genuine concern on the part of the central bank. But the inefficiency arises when holdings are excessively limited to the point where they are disincentivized. A way to avoid this is the publication of a concrete framework.
The RBI has a well-established practice of publishing condition-based regulatory roadmaps. Some examples include the Priority Sector Lending framework, which has quantified targets and timelines; the Small Finance Bank licensing framework that has laid out explicit capitalization thresholds for conversion to universal banks; and the NBFC regulatory tightening post-IL&FS, which followed a published, staged approach.
The case of the UPI limit governance is similar. When the RBI raises UPI limits, NPCI issues a circular with an explicit implementation deadline, and banks are given a compliance window.
The process is announced, documented, and time-bound. No equivalent framework exists for CBDC transaction limits. No MPC statement or no RBI Annual Report section has specified at what level of adoption, at what demonstrated disintermediation ratio, or after what period of monitoring, limits would be revised upward.
The prescription, and the institutional ask
The RBI should publish a CBDC Disintermediation Risk Framework, similar to its 2022 concept note, which introduces the idea and basis of a digital currency. The former proposed framework must act as a more nuanced and pilot-data-driven standalone consultation paper before a full launch is initiated.
The framework can consist of elements like a measurable threshold (the level of CBDC-attributable deposit migration as a percentage of total CASA deposits), a staged revision roadmap, and an evaluation of the non-remunerative design of the CBDC in the case of transaction limits (or revision of the transaction limits in case of a concrete non-remunerative design). For the same, apart from local expertise for domestic conditions, models from the ECB, BIS, or the Bank of England can be studied.
Finally, India must not ignore its CBDC amid other economic turmoil and instead seek a first-mover advantage. For that, it requires a policy framework that is suited to its economy. It has been 3.5 years since the CBDC pilot, and it can be argued that by now, the RBI should have published a robust scale-adoption and transaction limit framework.
(Aniket Kshirsagar is a graduate of Economics and Psychology from CHRIST (Deemed to be University), Bengaluru. His core research interest lies in macroeconomics and financial economics, especially Indian CBDC.)
The views expressed are not necessarily those of The South Asian Times
