UPI MDR kicks in October 15: RBI DG says merchant fee on payments above Rs 2,000 won’t trigger cash surge

The introduction of a Merchant Discount Rate (MDR) on larger UPI merchant payments is unlikely to trigger a shift back towards cash, Reserve Bank of India Deputy Governor Shirish Chandra Murmu said on Friday, playing down concerns that the charge could reverse some of the gains made by digital payments.

From October 15, a 0.4% MDR will apply to person-to-merchant UPI transactions above Rs 2,000. Merchants, rather than consumers, will bear the charge, which will be capped at Rs 300 for transactions worth Rs 75,000 or more.

Person-to-person transfers and most everyday merchant payments will continue to remain free.


Addressing a financial market conclave organised by BCC&I in Mumbai, Murmu said concerns that merchants or users could gravitate towards cash after the introduction of MDR were unlikely to persist.

"I don't think that apprehension will come true. It will be just initial apprehension," Murmu said.

He acknowledged that the change represented a significant shift in how costs associated with the payments ecosystem would be recovered, but said that should not materially increase cash usage.

"Because it is a major shift in terms of how basically you are recovering the cost. So, that's why it may be apprehension only. I don't think this will have any impact, unlike some voices about whether cash will go up because of this MDR."

Digital payments up, but why isn't cash disappearing?

Murmu also addressed what has often been described as India's "cash paradox" — the simultaneous expansion of digital payments and continued growth in currency circulation.

He argued that the trend was not contradictory because cash performs two functions in the economy: it is used to make payments as well as to store value.

"This cash paradox, actually, that is not my work. That is the way media has read it, and analysis has read it. Because it points towards data," he said.

"But I can tell you, if you look at it closely, it's no paradox."

"We are looking at cash in circulation, particularly notes in circulation. How it is getting impacted as digital currency is taking up," he added.

The assumption that greater adoption of digital payments should automatically result in a corresponding decline in currency in circulation, Murmu said, does not fully capture what is happening because both trends can occur simultaneously.

Over 600 RBI regulatory circulars in a year

Turning to the RBI's regulatory overhaul, Murmu said the central bank had issued more than 600 draft and final amendment circulars over the past year.

"We have, in fact, if you count, you take a simple count of the number of draft circulars we have issued, and the final amendment circulars, in the last one year it will be more than 600," he said.

Murmu, however, cautioned against interpreting that number as evidence of a sharp increase in the compliance burden facing banks and other financial institutions.

The RBI has reorganised regulated entities into around 11 categories, meaning some regulatory changes have resulted in multiple circulars covering different groups.

"So, don't get intimidated by the number. Because what we have done, we have reclassified all our regulated entities into some 11 categories. So, some of the circulars are basically a multiple of 11," he said.

According to Murmu, the restructuring is intended to make compliance easier for entities regulated by the central bank, even if that means shifting more of the workload to the RBI itself.

"So, from a regulated entity point of view, we are reducing their burden, and that burden we have shifted towards us," Murmu said.

RBI seeks balance between principles and rules

Murmu also clarified that the RBI's push towards principle-based regulation should not be interpreted as an abandonment of prescriptive rules.

"See, when we say we are basically moving towards as much as possible principle-based, but you cannot give up your rule-based also. See, it's a balance," he said.

The approach seeks to combine broader regulatory principles with specific rules where they remain necessary.

AI won't take accountability away from bank boards

Murmu also addressed the growing deployment of artificial intelligence across banking and financial services, stressing that greater reliance on machines would not dilute the responsibility of boards.

"At the end of the point what I was making in my speech was that irrespective of whether machines replace humans or supplement them, the accountability will rest with boards," he said.

As financial institutions increasingly move from human intelligence towards machine intelligence, boards themselves will need to understand the technology and its implications, Murmu said.