Reserve Bank of India Governor Sanjay Malhotra has said that the introduction of a small merchant fee on certain digital payments is unlikely to cause a significant decline in transaction volumes. His comments came on Wednesday after the central bank announced its latest monetary policy decisions. The governor said the RBI has not observed any reduction in transaction volumes so far and indicated that he does not expect the new charge to materially change the way people and businesses use the country's digital payment network. The remarks come at a time when India's payment ecosystem is preparing for a major change in the long-standing zero-MDR structure for a limited category of merchant transactions. Under the revised framework, selected higher-value payments made to merchants will attract a charge beginning October 15.

What Is Changing Under the New MDR Framework?

The new structure applies a 0.4 per cent Merchant Discount Rate to eligible person-to-merchant payments above ₹2,000. The framework is scheduled to take effect from October 15, 2026. The charge is primarily relevant to merchants receiving qualifying payments. It is not a fee that customers are expected to pay separately while making a UPI payment. The MDR is also capped at ₹300 for transactions of ₹75,000 and above. This means that the percentage-based charge does not continue increasing indefinitely as the value of a transaction rises. The revised arrangement also keeps several categories outside the standard 0.4 per cent structure. Certain essential sectors have been assigned a flat charge, while specified financial-market transactions carry a separate lower rate.

Why RBI Governor Is Not Expecting a Major Impact

Malhotra's assessment is based on the relatively small size of the fee and the current strength of digital payments in India. According to the governor, the RBI is not seeing a decline in volumes at present. He also indicated that a modest merchant-side cost is unlikely, by itself, to cause a major change in the overall use of the payment system. The comments are significant because UPI has become deeply integrated into everyday commerce, from large purchases and online payments to payments at neighbourhood stores. The continued expansion of digital payments has also made UPI an important part of India's broader financial infrastructure. The key issue now will be how merchants respond once the new framework becomes operational. While the charge is not intended as a direct consumer fee, businesses will need to account for the additional payment-processing cost in their operations.

Customers and Merchants Face Different Implications

One of the most important aspects of the new arrangement is the distinction between customers and merchants. A customer making an eligible payment should not interpret the introduction of MDR as a separate UPI charge appearing on the payment itself. The government has clarified that the MDR operates within the merchant payment ecosystem, while customers are not required to bear the charge. For merchants, however, the calculation is different. Businesses that fall within the applicable category will have to factor the MDR into their payment costs. For example, a qualifying ₹10,000 merchant transaction at the 0.4 per cent rate would result in an MDR of ₹40, subject to the applicable rules and exemptions. The cap becomes relevant for much larger transactions.

RBI Also Focuses on Bank Credit Growth

Malhotra's comments on digital payments came alongside a broader discussion about the Indian economy and the banking sector. The RBI governor said bank credit growth is expected to remain strong and continue supporting economic activity. The assessment comes as policymakers monitor liquidity conditions, lending trends and the financial position of different parts of the banking system. He also acknowledged that the central bank remains attentive to potential risks to asset quality at non-bank lenders, particularly in an environment where liquidity remains abundant. At the same time, Malhotra said the RBI does not currently expect the adverse scenario being discussed to materialise. The governor also said the exceptionally high surplus liquidity seen in the banking system over recent weeks is not expected to continue for an extended period.

Read Also: Bhagwant Mann Says CBI Returned Empty-Handed After Punjab Search

RBI Raises Repo Rate by 25 Basis Points

The UPI discussion came on a significant policy day for the central bank. The RBI raised its benchmark repo rate by 25 basis points to 5.50 per cent, marking its first rate increase since February 2023. The policy move came against a backdrop of inflation concerns, higher energy prices and uncertainty linked to global developments. The RBI also shifted its policy stance towards calibrated tightening. Malhotra made it clear that an immediate rate cut is not currently on the table, indicating that the next policy move could involve either another increase or a pause depending on economic conditions. The rate decision is important for households and businesses because changes in the policy rate can influence borrowing costs, lending rates and broader financial conditions.

Strong Deposit Flows Highlight Financial Confidence

The governor also referred to the response to the FCNR(B) deposit scheme, under which banks raised nearly USD 133 billion from the overseas Indian community through a concessional swap facility. Malhotra presented the response as an indication of underlying strength in India's macroeconomic fundamentals. The RBI expects banks to deploy these funds prudently. The central bank will continue to monitor how additional liquidity and credit conditions affect financial stability and economic activity. This is particularly relevant at a time when policymakers are attempting to balance growth requirements with inflation and financial-sector risks.

External Pressures and Current Account Concerns

Malhotra also addressed pressure coming from external factors. He said weaker external flows have contributed to pressure on the current account but described the situation as temporary. He expressed confidence that India's Balance of Payments position would move back towards surplus as supporting factors strengthen. Global uncertainty remains an important consideration for policymakers because movements in energy prices, capital flows, currency markets and geopolitical conditions can influence India's inflation and external-sector outlook. The RBI's latest policy decisions therefore cover a much wider picture than the UPI fee alone.

What the New UPI Rule Could Mean for Digital Payments

The real impact of the MDR change will become clearer after the framework takes effect on October 15. The central question will be whether merchants absorb the additional cost without changing their payment preferences, or whether some businesses attempt to encourage alternative payment methods. For consumers, the continued availability of UPI without a direct MDR charge is expected to remain an important factor in maintaining its popularity. The RBI's current position is clear: it does not expect the relatively small merchant fee to create a major decline in transaction volumes. Actual payment behaviour over the coming months will provide a better indication of how merchants and consumers respond to the new structure.