Reserve Bank of India (RBI) Governor Sanjay Malhotra on Wednesday said it was “premature” to speculate on the future of the merchant discount rate (MDR) for digital payments, including UPI, as the government is still amending laws governing the country’s payments ecosystem.
Responding to questions on whether the proposed legal changes could revive MDR, Malhotra urged caution. “Right now the government is bringing the amendment. Costs have to be paid by someone. We all want this public infrastructure to strengthen and become more efficient. That continues to be our focus. Let us wait and watch for further developments,” he said.
Speaking at the customary post-monetary policy press conference, Malhotra said the focus should remain on strengthening India’s digital payments infrastructure, while noting that someone must ultimately bear the costs of maintaining and expanding such a public digital network.
His remarks come amid speculation that the government’s proposed amendments to digital payments-related legislation could pave the way for reintroducing MDR on certain categories of UPI transactions, particularly high-value merchant payments.
Someone has to bear the cost
Malhotra also said that while India’s digital payments infrastructure has become a public utility, its development and maintenance require sustained investment.
He said there are broadly two ways to finance such infrastructure: either through taxation, where the government funds the system using public money, or through a “user pays” model under which merchants pay an MDR on transactions.
“The important aspect is that someone has to pay for the service,” the RBI chief said.
Explaining the economics of digital payments, Malhotra noted that under the MDR model, merchants or users engaging in transactions bear the cost directly. In contrast, when MDR is not levied, the expense is effectively borne by taxpayers through government support.
“What is important is that we continue to invest and continue to find the means, whether it is MDR or others. Let us wait and see how the situation evolves,” he added.
Why the MDR debate matters
Since the government removed charges on UPI and RuPay debit card transactions to encourage digital payments adoption, the question of MDR has remained contentious.
Banks, payment service providers and other industry stakeholders have repeatedly argued that the absence of MDR limits their ability to recover infrastructure and operational costs, particularly as digital transaction volumes continue to surge.
At the same time, the government maintained that free digital payments have been instrumental in accelerating financial inclusion and boosting UPI adoption across the country.
Market participants have speculated that, if introduced in the future, MDR could apply only to certain high-value merchant transactions while keeping person-to-person UPI transfers free.
RBI pushes digital payments expansion
Separately, RBI Deputy Governor Rohit Jain said usage of the central bank’s digital currency, the e-rupee, continues to grow, with the Reserve Bank encouraging banks to develop new use cases for the digital currency.
He also highlighted the RBI’s push for wider adoption of the Unified Lending Interface (ULI), a platform designed to reduce loan processing and disbursal timelines through digital integration.
According to Jain, as many as 12 states have already digitised their land records, an important prerequisite for the successful rollout of ULI, while several others are completing this exercise, paving the way for broader adoption of digital lending infrastructure.