RBI Governor Says 0.4% UPI MDR Unlikely to Hurt Transaction Volumes

Reserve Bank of India Governor Sanjay Malhotra said on Wednesday that the new merchant discount rate on select UPI payments is unlikely to have a major impact on transaction volumes when it takes effect on October 15.

Asked at the RBI's October 7 post-monetary policy press conference whether MDR could lead to fewer UPI transactions, Malhotra said the central bank was not seeing a decline in volumes and that he did not personally expect a small fee to have a major effect. His remarks were reported by The Hindu and independently by Business Standard.

The comment is an expectation about how users and merchants will respond, not evidence of the MDR's impact after implementation. The revised framework begins on October 15, 2026, so transaction data after that date will provide the first clearer indication of whether higher-value merchant payments change.

What the new UPI MDR actually changes

Under the new framework, a standard MDR of 0.4% will apply to eligible person-to-merchant UPI transactions above ₹2,000. For eligible transactions of ₹75,000 and above, the MDR is capped at ₹300 per transaction.

The charge is paid within the merchant-payment ecosystem. It is not a new fee imposed on consumers making UPI payments.

The Finance Ministry said in its September 15 clarification that all person-to-person UPI transfers will remain free regardless of the amount. Merchant payments of up to ₹2,000 will also remain free of MDR.

Small merchants, including street vendors receiving up to ₹1 lakh per month through UPI QR codes under the Person-to-Person-Merchant category, will continue to receive zero-MDR treatment on all eligible transactions.

About 96% of merchant transactions remain unaffected

The Finance Ministry estimates that approximately 96% of person-to-merchant UPI transactions will remain outside the new MDR because they either fall within the free payment threshold or qualify under the zero-MDR framework for small merchants.

That is important to Malhotra's argument about transaction volumes. The new charge does not apply across the entire UPI network, and the overwhelming majority of merchant transactions by volume will continue without MDR.

The government has also clarified that MDR is neither a tax nor a charge collected by the government or NPCI. It is distributed among participants in the payment ecosystem, including banks and payment application providers, to support the operation and expansion of UPI.

Consumers should not be charged the MDR

Consumers will continue to make UPI payments without paying MDR. The government's framework also bars a separate transaction fee, platform fee or other UPI payment charge on individuals for person-to-person transfers.

For merchant payments, the MDR is borne by the eligible merchant rather than the customer. Merchants covered by the framework cannot pass the MDR on as a separate UPI charge to customers.

This distinction means a customer paying more than ₹2,000 through UPI should not see a 0.4% MDR added to the payment simply because the transaction crosses the threshold.

Why the impact on UPI volumes is being watched

UPI grew rapidly while merchant payments operated largely under a zero-MDR regime. Introducing a cost for some higher-value transactions has therefore raised questions about whether affected merchants could become less willing to accept or encourage UPI for larger purchases.

Malhotra's position is that the fee is small enough that it should not materially alter overall UPI usage. The design of the framework also limits its reach by preserving free P2P transfers, free merchant payments up to ₹2,000 and zero MDR for qualifying small merchants.

Whether that assessment proves correct will become measurable only after the new rules take effect. Changes in the number and value of eligible merchant transactions after October 15 will be the clearest test of whether the 0.4% MDR affects payment behaviour.