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

Reserve Bank of India (RBI) Governor Sanjay Malhotra dismissed concerns that the reintroduction of a Merchant Discount Rate (MDR) on Unified Payments Interface (UPI) transactions would dampen digital payment volumes, affirming that the central bank has observed no slowdown in activity.

Speaking at the post-monetary policy press conference in Mumbai, Malhotra clarified that the operational framework has already been established by the government.

"On UPI-MDR, a decision has already been taken. As of now, we do not see any drop in volumes, and I don't personally think that a small fee will have a major impact on the volumes," Malhotra stated.

Structure of the Revised MDR Framework

Effective October 15, 2026, the updated payments mechanism ends nearly six years of a blanket zero-MDR mandate on UPI payments. The levy is designed to distribute processing commissions among acquiring banks, payment service providers (PSPs), and UPI application networks.

Key Features of the October 15 Mechanism:

• Threshold and Cap: A 0.4% MDR applies strictly to person-to-merchant (P2M) transactions exceeding ₹2,000, with total fees capped at ₹300 for payments of ₹75,000 and higher.
• Retail Shielding: Person-to-person (P2P) transfers and low-value P2M transactions up to ₹2,000 remain entirely free of charge, leaving more than 95% of daily UPI transaction volumes insulated from MDR.
• Consumer Protection: Application providers and merchants are barred from passing charges onto retail shoppers or adding hidden platform fees.
• Special Flat and Concessional Categories: Essential utilities, fuel, telecom, insurance, and agricultural inputs will face a flat MDR of ₹5 per transaction above ₹2,000, while capital market transactions—including mutual funds and stockbrokers—will carry a lower MDR of 0.02% capped at ₹300.
• Incentive Allocation: Five percent of all collected MDR revenue will be channeled into a dedicated fund aimed at broadening digital adoption among small merchants across semi-urban and rural markets.

Financial and Market Implications

The move to reinstate MDR addresses recurring operational strain within India's digital payments architecture. In August 2026, UPI processed 24.51 billion transactions valued at nearly ₹29.9 lakh crore, before easing slightly to 24.07 billion transactions worth ₹29.37 lakh crore in September.

With the annual cost of maintaining UPI network bandwidth, server capacity, and cybersecurity infrastructure estimated at approximately ₹20,000 crore, the zero-fee regime had required direct budgetary subsidies to bridge revenue gaps for participating lenders.

For listed banks, payment aggregators, and financial technology service providers, the phased return of MDR provides a sustainable operational margin on high-value retail transactions, ensuring capital availability to maintain server uptimes and upgrade transaction infrastructure.

Tags: Reserve Bank of India National Payments Corporation of India Unified Payments Interface Fintech Banking Sector