Will MDR on UPI give a boost to digital rupee?

It was back in 2022 that a pilot project was launched for central bank digital currency (CBDC) as a part of Reserve Bank of India’s plans to push digital sovereign currency. In the last few years, there have been several more pilots launched in the wholesale as well as retail segments of CBDC. But the adoption thus far has been low and lags the more established and widely accessible unified payments interface (UPI) significantly.

The Reserve Bank of India’s (RBI’s) own data points to the value of retail CBDC in circulation in the 2025-26 financial year declined to Rs 771.66 crore from Rs 1,016.46 crore in the previous year.

UPI, launched in 2016, has over time emerged as the most popular digital payments platform. Latest data released by the National Payments Corporation of India (NPCI) shows that there were 24.07 billion UPI transactions in September 2026, worth Rs 29.37 lakh crore. Recently, it was announced that from October 15, an MDR (merchant discount rate) of 0.40% will be charged on UPI transactions above Rs 2,000.

MUST READ | 'No UPI Day' withdrawn after traders meet FM Sitharaman over proposed MDR

Will that lead to faster adoption of the digital rupee? Geeta Chugh, MD, sector lead, financial institutions ratings at S&P Global, feels that the impact could be modest at best, and UPI is expected to remain the key payments infra.

“UPI makes it extremely efficient to transfer money, and I think that is going to be there. One of the important decisions that RBI took was making CBDC interoperable with UPI, which means you can use the UPI QR code to transfer CBDC as well. But CBDC requires an additional element of downloading a wallet and moving money there; it's not interest-paying. So, there is a little degree of additional hassle involved in terms of using CBDC,” noted Chugh in an interaction.

Importantly, she stressed that the bigger risk was about underinvesting in the payments infrastructure, and therefore MDR in a way was warranted.  Chugh said that CBDC shouldn’t be seen as a competitor or replacement to UPI. But its key advantage was making money programmable.

DON'T MISS | Repeated ₹2,000 UPI payments for one purchase? Your bank could flag the pattern: What it means

“India’s CBDC should not be judged by wallet adoption. It should be judged by whether it makes money programmable and settlement more efficient. Those are the far more important parameters to look at rather than retail adoption,” she said.

According to her, a programmable CBDC allows rules and compliance to be embedded directly into money itself, and funds can be released when certain preconditions are met, restricted to certain uses, or even linked to specific outcomes.

“India has piloted programmable payments linked to various outcomes. We have seen various use cases, including carbon credit payments, targeted lending, subsidies, welfare transfers…,” Chugh pointed out.

ALSO READ | MDR on UPI over ₹2000: SC refuses stay; issues notices to govt, RBI, NPCI

According to S&P Global, India doesn’t need a CBDC to digitise payments. The digital rupee will evolve into a settlement asset for select use cases, it said. In a report, Chugh and Zahabia Gupta (MD and head of credit research, emerging markets at S&P Global) argue that the digital rupee should be judged on outcomes, such as whether it lowers subsidy leakage in direct benefit transfer cases, enables programmable lending, cuts cross-border settlement costs and improves securities settlement, not wallet counts.

Multiple CBDC pilots were launched under direct benefit transfer (DBT) schemes of the Centre and State governments in 2025-26, leveraging the programmability capability of CBDCs, the RBI said in its annual report earlier this year.

In Gujarat, Puducherry and Chandigarh, for instance, public distribution system (PDS) beneficiaries were credited with food subsidy through programmable CBDC, redeemable for eligible commodities at fair price shops/ identified merchants. Separately, on asset tokenisation, RBI developed the Unified Markets Interface (UMI), a multi-layer platform to facilitate tokenisation of financial assets while leveraging wholesale CBDC to enhance settlement efficiencies.

Recently, speaking at the Global Fintech Fest, Finance Minister Nirmala Sitharaman urged the RBI to advance its CBDC initiatives further and sharpen its capabilities with the digital rupee.