UPSC Prelims 2024 Q53: Indian Economy – Digital Payments & Financial Inclusion
Consider the following statements in respect of the digital rupee :
1. It is a sovereign currency issued by the Reserve Bank of India (RBI) in alignment with its
monetary policy.
2. It appears as a liability on the RBI's balance sheet.
3. It is insured against inflation by its very design.
4. It is freely convertible against commercial bank money and cash.
Which of the statements given above are
correct ?
- (a) 1 and 2 only
- (b) 1 and 3 only
- (c) 2 and 4 only
- (d) 1, 2 and 4
Answer: (d) 1, 2 and 4
Explanation
Digital Rupee (e-Rupee / CBDC) - Statement Analysis
| Statement | Verdict | Reason |
|---|---|---|
| 1. Sovereign currency issued by RBI aligned with monetary policy | TRUE | Digital Rupee is a Central Bank Digital Currency (CBDC) - legal tender issued by RBI. Directly aligned with RBI monetary policy as it is the central bank's own currency. |
| 2. Appears as a liability on RBI balance sheet | TRUE | Like physical currency notes, e-Rupee is a RBI liability - the central bank owes its value to the holder. Both physical and digital rupees are recorded as RBI liabilities. |
| 3. Insured against inflation by its very design | FALSE | The Digital Rupee has no built-in inflation protection. It is denominated in Indian Rupees and will lose real purchasing power with inflation - just like physical currency. No CBDC provides inflation insurance. |
| 4. Freely convertible against commercial bank money and cash | TRUE | 1 e-Rupee = 1 physical Rupee = 1 unit of bank deposit. It maintains 1:1 parity and is freely exchangeable. |
Answer: (d) 1, 2 and 4.
Why each option is right or wrong
- (a) Incorrect. Statements 1 and 2 are both correct, but Statement 4 is also correct (1:1 convertibility with bank money and cash). Statement 3 is the only false one - e-Rupee has no inflation protection.
- (b) Incorrect. Statement 3 is false - e-Rupee does NOT protect against inflation by design. No CBDC has built-in inflation protection. It loses purchasing power like any fiat currency.
- (c) Incorrect. Statement 4 is also correct (free convertibility at 1:1 parity with cash and bank money). Statement 3 is false.
- (d) CORRECT. Statements 1 (sovereign currency by RBI), 2 (RBI liability), and 4 (freely convertible at 1:1) are all correct. Statement 3 is false - e-Rupee has no inflation-protection mechanism by design.
Key point
e-Rupee = CBDC issued by RBI = sovereign currency = RBI liability = freely convertible 1:1. NOT insured against inflation - it loses real value with inflation just like physical currency.
Remember
Digital Rupee is a CBDC: RBI-issued sovereign currency, appears as RBI liability, freely convertible 1:1 with cash and bank money. It has NO inflation protection by design.
Common mistakes
- Thinking Digital Rupee protects against inflation because it is digital - there is no such feature. Inflation erodes its purchasing power like any fiat currency.
- Confusing e-Rupee (CBDC, RBI liability) with UPI payments (which use commercial bank money, not direct RBI liability).
- Forgetting that e-Rupee appears as a LIABILITY on the RBI balance sheet - just like printed notes, the central bank owes its value to the holder.
Exam tip
e-Rupee vs Physical Rupee: Both are RBI liabilities. Both lose value with inflation. Both are legal tender. The ONLY difference is the form - digital vs physical. Never assume a digital currency has extra features like inflation protection.
Sources
- RBI Concept Note on Central Bank Digital Currency (2022)
- RBI Annual Report - CBDC Framework