The Reserve Bank of India (RBI) on Thursday launched the first pilot project for retail digital rupee in Mumbai, New Delhi, Bengaluru and Bhubaneswar.

The retail digital rupee (e?-R) project has started in a closed user group with the participation of four lenders -- State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank -- as well as customers and merchants.

The launch comes a month after the Reserve Bank of India (RBI) started a pilot in the digital rupee - wholesale on November 1.

In the second phase of retail digital rupee project, nine more cities and four more banks will be included.

The e?-R is in the form of a digital token that represents legal tender and would offer "features of physical cash like trust, safety and settlement finality", according to the RBI.

"As in the case of cash, it will not earn any interest and can be converted to other forms of money, like deposits with banks," the central bank said while announcing the pilot project on November 29.

The use of digital rupee is also expected to reduce the operational costs related to management of physical currency as well as increase financial inclusion in the economy.

In a release on Thursday, Yes Bank said it rolled out the RBI's CBDC (Central Bank Digital Currency) for its closed user group, comprising its retail customers and merchants.

During the pilot phase, access to the Yes Bank Digital Rupee app will be given to the bank's select retail customers who will be part of the closed user group, it added.

CBDC is a digital form of currency notes issued by a central bank. While most central banks across the globe are exploring the issuance of CBDC, the key motivations for its issuance are specific to each country's unique requirements.

Based on the requirements placed by banks, digital rupee will be created by the RBI using latest technology and digitally issued to the banks in a secure manner.

Customers will be able to place the request for digital rupee through the digital wallet in their mobile app provided by the banks and the requested amount would get credited to their digital rupee wallets.

The users will be able to transact with e?-R through a digital wallet offered by the participating banks and stored on mobile phones/devices.

Transactions can be both Person to Person (P2P) and Person to Merchant (P2M). Payments to merchants can be made using QR codes displayed at merchant locations.

Eight banks have been identified for phase-wise participation in the pilot project.

After State Bank of India, ICICI Bank, Yes Bank and IDFC First Bank, four more banks -- Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank -- will join the pilot project.

The other nine cities to which the pilot will be later extended are Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna and Shimla.

The scope of the pilot project may be expanded gradually to include more banks, users and locations as needed, as per the RBI.

Last month, the RBI said digital rupee - wholesale will help in reducing transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk.

The central government announced the launch of the digital rupee from fiscal year 2022-23 onwards in the Union Budget tabled in Parliament on February 1, 2022.

In a recent concept note, the RBI said CBDC is aimed to complement rather than replace current forms of money and is envisaged to provide an additional payment avenue to users, not to replace the existing payment systems.

Across the globe, more than 60 central banks have expressed interest in CBDCs with a few implementations already under pilot across both retail and wholesale categories and many others are researching, testing, and/or launching their own CBDC framework.