MDR apprehension unlikely to spur higher cash usage: RBI Deputy Governor
From 15 October 2026, a Merchant Discount Rate (MDR) of 0.4% will apply to person-to-merchant (P2M) UPI transactions above ₹2,000
The charge is to be paid by merchants, not consumers, and is capped at ₹300 for transactions of ₹75,000 or more
Person-to-person UPI transfers, and small-value P2M transactions up to ₹2,000, remain free of charge
The Reserve Bank of India's Deputy Governor stated that apprehension over the new MDR is unlikely to push users back toward cash, as digital payments are expected to keep expanding
Merchant Discount Rate (MDR) and India's Zero-MDR Policy History
MDR is the fee a merchant pays to their bank/payment-service provider for processing a digital payment; it typically funds the payments ecosystem (issuing bank, acquiring bank, network, and payment app). India made UPI and RuPay debit card transactions MDR-free through a 2019–2020 policy intervention aimed at accelerating digital payments adoption after demonetisation.
Key Details
- Zero MDR on UPI and RuPay debit was codified via amendments to the Payment and Settlement Systems Act, 2007 and the Income Tax Act, 1961 (Section 269SU, mandating specified large businesses to offer these modes without charges), effective 1 January 2020
- The zero-MDR regime lasted nearly six years before this reversal, ending 15 October 2026
- The government instead funded ecosystem costs through an Incentive Scheme that reimbursed banks/PSPs a percentage of UPI transaction value from the Union Budget
- The new 0.4% MDR reintroduces a market-based cost-recovery mechanism, shifting away from budgetary subsidy for at least the higher-value transaction segment
The RBI Deputy Governor's reassurance responds directly to concerns that ending the decade-long zero-MDR era could discourage merchants from accepting UPI or push transactions back to cash — the very outcome the original 2020 zero-MDR policy was designed to prevent.
NPCI and the Institutional Architecture of UPI
The National Payments Corporation of India (NPCI) is the umbrella organisation that operates retail payment systems in India, including UPI, IMPS, RuPay, and FASTag. It was incorporated in 2008 as a not-for-profit initiative of the RBI and the Indian Banks' Association (IBA) under the Payment and Settlement Systems Act, 2007.
Key Details
- UPI was launched on 11 April 2016 with a pilot involving 21 member banks, inaugurated by then-RBI Governor Raghuram Rajan
- RBI is the statutory regulator of the payment-systems ecosystem under the Payment and Settlement Systems Act, 2007, setting settlement standards, transaction limits, and safety mandates; NPCI operates within this regulatory framework
- NPCI, not the RBI directly, issues the operational circulars setting MDR slabs, transaction limits, and merchant-category exemptions
- Certain merchant categories (railways, telecom, insurance, fuel, among others) are set to attract a flat ₹5 per transaction MDR instead of the 0.4% ad valorem rate for transactions above ₹2,000
The MDR announcement itself comes from NPCI, illustrating the operational division of labour where RBI sets the overarching legal/regulatory framework under the PSS Act, 2007, while NPCI as the retail-payments operator sets and revises specific fee structures within that framework.
Digital Payments and Financial Inclusion Policy Trade-offs
UPI's rapid scale-up has been central to India's financial inclusion narrative, but its zero-cost model also created a structural revenue gap for banks and payment-service providers, which is the policy problem the new MDR is intended to address.
Key Details
- Small-value transactions (up to ₹2,000) constitute over 95% of total UPI P2M transaction volume and remain unaffected by the new charge, preserving low-income and small-merchant access
- Small merchants under UPI's P2PM (person-to-small-merchant) framework receiving up to ₹1 lakh per month via UPI QR codes continue to enjoy zero MDR regardless of transaction size
- The zero-MDR policy is frequently cited in Mains answers on Digital India and financial inclusion (alongside PMJDY, Jan Dhan-Aadhaar-Mobile trinity) as a case study in state-subsidised infrastructure for inclusion
- The MDR reversal is being framed as a shift toward ecosystem self-sustainability without reducing access for small-value, low-income transactions
The RBI Deputy Governor's comment that MDR apprehension is unlikely to spur cash usage reflects this calibrated design — because the overwhelming majority of transaction volume (sub-₹2,000, and all P2P transfers) stays free, the policy aims to recover costs from high-value merchant transactions without disturbing the financial-inclusion gains built since 2016.
- New MDR: 0.4% on P2M UPI transactions above ₹2,000, effective 15 October 2026
- Cap: ₹300 for transactions of ₹75,000 and above
- Exempt: all P2P transfers; P2M transactions up to ₹2,000; small merchants under P2PM receiving up to ₹1 lakh/month via UPI QR
- Special flat rate: ₹5 per transaction for select categories (railways, telecom, insurance, fuel) above ₹2,000
- UPI launched: 11 April 2016, pilot with 21 member banks
- Zero-MDR mandate in force: 1 January 2020 to 14 October 2026 (via PSS Act, 2007 and Income Tax Act, 1961 Section 269SU amendments)
- Sub-₹2,000 transactions constitute over 95% of total UPI P2M volume