Mint ·
Economy, business and finance
Fee on UPI may nudge retail users towards central bank digital currency
MDR on UPI transactions can boost adoption of central bank digital currency, or e-rupee, as merchants seek free alternatives.
Mumbai: The introduction of merchant discount rate (MDR) charges on person-to-merchant (P2M) transactions on the unified payments interface (UPI) could help the government and the Reserve Bank of India (RBI) push retail use cases for the central bank digital currency (CBDC), especially for key subsidy transfers. Higher adoption of the digital currency is also seen easing some burden off the over-strained UPI.
There is an expectation that the introduction of MDR could give a push to retail CBDC adoption, as some users and merchants may move towards the digital rupee to avoid such charges, which could have a positive impact on its adoption, three people aware of the development told Mint.
It is also expected that the government's move on MDR on Tuesday is just the first phase of charges on UPI, and as these charges rise and extend to other payment segments, some merchants and users could find value in shifting to CBDC wallets that remain completely free as of now.
So far, the adoption of CBDC has been low due to the widescale use of UPI, given its easier customer interface and technological advancements by private fintechs on guardrails. In comparison, CBDC for retail users has so far been rolled out only by certain banks and is still ‘invite-only’ for customers of most banks, as they test resilience and load carrying abilities of the infrastructure within closed user groups.
“If merchants want to avoid the transaction cost or MDR on larger-value transactions, they will have the option of accepting payments through CBDC, where there may not be any charge,” said former RBI deputy governor R. Gandhi.
“The choice between UPI and CBDC depends on several factors. The hope would certainly be that CBDC develops further. But it is still in the pilot stage, and it is not easy for ordinary customers to accept CBDC straight away,” he said, adding that CBDC requires considerable adoption.
To be sure, CBDC is interoperable with UPI, which means payments in CBDC can be made through UPI infrastructure and QR codes. While this provides a huge customer facing infrastructure for CBDC, the backend processing for such payments by banks and the RBI is still different and requires work before it can be rolled out at full scale, said two of the people cited above.
"CBDC transactions do not involve MDR because they do not need the interbank settlement chain involved in usual account to account payment transactions. As a sovereign form of money in the digital form, CBDC does not have the trappings of MDR," said Sharat Chandra, founder EmpowerEdge Ventures, a venture building firm for fintechs and startups. MDR on UPI transactions can provide the necessary tailwind for retail CBDC adoption given there is enough awareness on CBDC usage among merchants, he added.
While CBDC usage is currently low, the government is in an advanced stage of finalizing specific use cases to enable the use of retail CBDC, starting with government subsidies under agriculture, the two people said.
“With programmable CBDC, payouts under direct benefit transfer can be transferred to farmers, who then may use it only for agriculture-related purposes such as buying fertilizer or seeds," said one of the people quoted above. "The government is thinking along these lines and planning to come out with such national use cases soon.” Such transfers will also help the government track the end use of subsidies and avoid channel leaks, the person added.
The central bank is currently running some state-level pilots for direct benefit transfer of subsidies.
Other such use cases being considered include payouts or chargebacks under the flagship healthcare programme Ayushmaan Bharat Scheme and for educational fees and payments, in addition to rural and semi-urban use cases through offline CBDC wallets.
The pilot for the first such use case, likely payments under DBT, is expected to be rolled out in the next six to seven months, the people said.
In its annual report for 2025-26, RBI had said some CBDC pilots were launched during the year, leveraging the programmability capability of CBDCs. In Gujarat, Puducherry and Chandigarh, public distribution system (PDS) beneficiaries were credited food subsidy through it.
The people cited above conceded that CBDC adoption will require extensive customer engagement and awareness, as most Indians still don’t understand what it means or how it works.
The government is also of the view that shifting some low value transactions to CBDC will help ease the burden on the UPI infrastructure, which saw at least two major outages in 2025. While the National Payments Corp of India (NPCI) has since addressed the outages, ecosystem players have cautioned that significant investments are required in expansion and upkeep of UPI as well as in cyber security and data protection.
“The idea is that the load that was being incurred through DBT transfers on UPI and other such use cases will be transferred to CBDC. We cannot have failure of UPI because of its scale and if they happen, credibility goes down for UPI as well as the banks," said the second person. "So there is a need to distribute to different channels and reduce the load on UPI.”
India's UPI platform processed 241.6 billon transactions worth ₹314.2 trillion in FY26, up 30% on year in terms of volume and 21% in terms of value of transactions. UPI had over 550 million users as of August 2026, as per NPCI data.
The central bank introduced India’s CBDC—known as the ‘digital rupee’ or ‘e-rupee’—in two formats: the pilot for the wholesale e-rupee or CBDC-W was launched on 1 November 2022, and for retail e-rupee or CBDC-R exactly a month later.
The value of bank notes in circulation in CBDC-R was at ₹771.66 crore as on 31 March, 2026, lower than ₹1,016.46 crore as on 31 March, 2025. The value of bank notes in circulation under CBDC-W, was nil as the wholesale segment is being used for settling large value transactions among financial institutions and has an auto redemption feature, and thus, does not reflect the transaction volumes and values. RBI Governor Sanjay Malhotra, had at an international conference in July, said CBDC had now reached 12 million users, and more than 175 million transactions were processed worth nearly ₹400 billion since launch.
On Tuesday evening, the finance ministry and the NPCI notified a MDR of 0.4% on P2M transactions of over ₹2,000 with an overall cap of ₹300. The charge for securities and investments is lower at 0.2%, whereas UPI payments for specific industry use cases such as agricultural inputs, education, fuel, utility bills, railways, telecommunications and insurance will entail a flat fee of ₹5.