RBI’s digital rupee is a token-based form of central bank money, equivalent in value to physical cash but existing only as regulated digital tokens on RBI-managed infrastructure.[1][2] It is distinct from bank deposits and private wallets because it is a direct claim on the central bank, not on a commercial bank.

Key design elements relevant to 2025–26:

- Two-tier model: RBI issues e₹ to banks; banks distribute to users via wallets and apps.[1][5] - Separate wholesale (e₹-W) and retail (e₹-R) pilots for interbank settlement and consumer/merchant use.[1][4] - Non-interest bearing: CBDC itself does not pay interest but can be converted into deposits.[1] - Emphasis on programmability, cross-border use, and offline capability in next phases.[2][3][4]

Pilot scale and trajectory (indicative, based on public disclosures and trackers):

This cautious approach reflects RBI’s priority to avoid destabilising UPI and bank deposits while gathering robust data on user behaviour, cyber risk, and operational resilience.[2][5] In practice, 2025–26 is likely to see:

- Integration of CBDC wallets with UPI QR rails and RuPay cards for seamless acceptance.[2] - Wider use in government payments (DBT, subsidies, GST refunds) leveraging programmability.[4][5] - Pilots in cross-border trade with Singapore and UAE corridors.[2][6]

Pros and cons of this architecture for the financial system:

For investors, the key takeaway is that e₹ is being designed as core monetary infrastructure, not a speculative asset. The bigger impact will be indirect: on bank funding models, payment economics, and risk-free yield curves, which in turn will influence valuations of banks, fintechs, and NBFCs.

UPI currently dominates India’s retail digital payments, contributing a major share of transaction volume and value.[5] CBDC introduces another form of digital settlement asset, but RBI has repeatedly emphasised complementarity: e₹ is meant to ride on—or alongside—UPI rails, not displace them.[1][2][5]

Expected interactions between UPI and e₹ in 2025–26:

- CBDC wallets linked to UPI handles (e.g., mobile number@bank) enabling UPI-CBDC interoperability. - Merchants accepting the same UPI QR code for both bank-account-based UPI and CBDC-based payments. - Government and large enterprises using e₹-W for wholesale settlement and UPI for invoice-level reconciliation and reporting.

Comparison of UPI vs CBDC features from a payments standpoint:

Fintech and payment processor impact:

- UPI-first fintechs (PhonePe, Google Pay, Paytm, Cred) may need to integrate CBDC wallets to stay relevant as government and corporate use-cases move to e₹. - MDR-free UPI already compresses monetisation; CBDC could further reduce pure payment economics, pushing fintechs towards lending, wealth, and insurance cross-sell. - Payment gateways and POS providers may see: - Lower settlement risk when merchants opt for same-day e₹ settlement. - Reduced reconciliation disputes due to token-based traceability.

Pros vs cons for merchants adopting CBDC in parallel with UPI:

For listed companies in payments and fintech, investors should monitor:

- Disclosures on CBDC integration timelines and capex. - New revenue lines around CBDC-based value-added services (e.g., programmable payroll, subsidy distribution for enterprises). - Any regulatory shift in MDR or wallet regulation linked to CBDC interoperability.

One of the biggest medium-term questions is how widespread CBDC adoption will affect bank deposits, which are the primary funding source for Indian banks and a key driver of net interest margins (NIMs). Since e₹ does not carry interest and is a direct liability of RBI, large-scale migration of balances from deposits to e₹ could, in theory, shrink the deposit base, forcing banks to raise costlier wholesale funding.[1][5]

However, RBI’s design choices and phased rollout aim to limit disruptive migration:

- No interest on CBDC to preserve the attractiveness of bank deposits.[1] - Likely caps on CBDC wallet size and transaction limits. - Targeted use-cases (DBT, subsidies, specific programmes) rather than universal, unconstrained usage in the early years.[2][4]

Potential liquidity impact channels:

- Retail: Households may keep 1–5% of liquid balances in CBDC for convenience, while the bulk stays in savings/FDs. - Corporate: Large firms could use e₹-W for intraday settlement, but park end-of-day surpluses in deposits, T-bills, or overnight mutual funds. - Government: Direct benefit transfers in e₹ could temporarily lift CBDC balances before they are spent back into bank deposits.

Illustrative comparison of funding mix pre- and post-CBDC adoption (stylised):

For money markets, tokenised wholesale CBDC (e₹-W) combined with deposit tokenisation pilots can:

- Shorten settlement cycles for corporate bonds, CP, and CDs.[3] - Reduce settlement risk and collateral requirements in RBI’s liquidity operations. - Enable intraday liquidity trading in near real time.

Pros vs cons for banks’ liquidity management:

For bank stocks, investors should pay attention to:

- CASA ratio trends vs CBDC adoption data. - Management commentary on CBDC-related liquidity planning. - IT and capex investments in CBDC integration and tokenisation infrastructure.

For Indian households, CBDC will function primarily as a transactional and safety asset, not a return-generating instrument. It will sit conceptually between physical cash and savings accounts in the liquidity spectrum.

Indicative comparison of major retail asset classes in a CBDC world:

A practical framework for a typical urban retail investor (age 30–45, moderate risk):

- Emergency/cash bucket (6 months’ expenses): - 5–10% in e₹ for instant access and digital payments. - 90–95% in high-quality savings/overnight funds or sweep FDs. - Short-term goals (1–3 years): - Predominantly in short-duration debt funds, FDs, or RBI bonds; CBDC primarily as a transaction layer. - Long-term wealth (5+ years): - Dominated by equity mutual funds, direct equity, and NPS; CBDC plays negligible allocation role.

Pros vs cons of holding CBDC in retail portfolios:

For financial planners and RIAs, a key task will be to re-bucket liquidity: shift some physical cash and wallet balances into CBDC, while ensuring that opportunity cost (lost interest) remains minimal by not parking too much in e₹.

CBDC adoption will create winners and losers across listed sectors. While exact outcomes depend on regulatory choices and technology execution, investors can frame sector exposure using a structured lens.

Indicative sector impact matrix:

Within banking, relative positioning (illustrative assessment):

Risk-return considerations for equity investors:

- Near term (1–2 years): - Capex and opex for CBDC integration could pressure cost-income ratios, particularly for smaller banks and fintechs. - Valuations may reflect uncertainty around deposit growth and payment fee income. - Medium term (3–5 years): - Banks that effectively leverage CBDC for analytics-driven lending and cross-sell could expand ROE. - IT and infra providers with strong CBDC project pipelines might see more stable annuity revenue.

Pros vs cons for sector investors:

While CBDC presents significant efficiency and inclusion benefits, it also introduces new categories of risk. Retail investors and financial professionals should approach the digital rupee with a balanced, risk-aware mindset.

Major risk categories:

- Technology and cyber risk: Concentration of critical infrastructure at RBI and a few tech providers increases the systemic importance of cyber defences. - Operational risk: Outages or glitches in CBDC rails could disrupt payments, especially if adoption becomes high. - Privacy and data: High traceability of transactions may raise concerns if governance is weak.[5][6] - Financial stability: In stress scenarios, CBDC could accelerate digital “bank runs” if large depositors rush to move from banks to e₹ without strong safeguards.

Comparison of risk profile: traditional vs CBDC channels.

RBI’s mitigating strategies include phased pilots, wallet limits, offline modes, and a strong emphasis on learning before mass rollout.[2][5] However, from an investor perspective, it is prudent to:

- Avoid over-concentration of liquid assets in any single digital channel. - Maintain backup payment options (cards, cash reserves) during the transition years. - Track evolving guidelines on CBDC dispute resolution, fraud handling, and consumer protection.

For equity and debt investors, risk analysis should incorporate:

- How well individual banks/fintechs manage cyber and operational risk around CBDC. - Whether governance standards and board oversight appear robust for firms investing heavily in CBDC infra. - Systemic risk assessments and stress tests published by RBI and international bodies.