The introduction of Unified Payments Interface (UPI) in 2016 was a major step towards making a significant dent in the cash-intensive economy. Built as an open, interoperable public infrastructure, free at the point of use, UPI soon became a matter of national pride, which other countries wanted to emulate. From 180 million transactions in 2017-18 to over 24 billion transactions a month worth close to ~30 trillion today, its growth is unmatched in the world. Crucially, it did bend the cash curve. Reserve Bank of India (RBI) data shows currency in circulation moderated from a peak of 14.4 per cent of GDP in 2020-21 to 11.2 per cent in 2024-25 as UPI expanded. A September 2025 study by RBI researchers noted that a possible driver behind the decline in cash demand was the rise of UPI. Without this substitution, it would be safe to assume that currency-in-circulation-to-GDP ratio would have been at least 2 percentage points higher.
Under the revised framework effective October 15, 2026, person-to-merchant UPI transactions above ₹2,000 will attract a 0.4 per cent merchant discount rate (MDR), capped at ₹300 and paid by the merchant, while transactions up to ₹2,000 will remain free. On paper, consumers pay nothing, and more than 96 per cent of shop payments by volume are below ₹2,000 and will remain free. Person-to-person transfers, which account for 38 per cent of volume and 70 per cent of value, will also remain free.
The concern is not the 96 per cent of transactions below ₹2000, which remain free, but the 4 per cent above ₹2000, which account for nearly two-thirds of total transaction value.
The chargeable cash transactions are expected to fall mostly within the ₹2,000 to ₹50,000 bracket — and that is where the financial impact will be felt. Because the fee is a full 0.4 per cent, it ranges from ₹12 on a ₹3,000 transaction to ₹200 on a ₹50,000 transaction, remaining entirely below the ₹300 cap that only kicks in on transactions above ₹75,000.
For a shop processing 50 bills of ₹10,000 a day, that translates to a new cost of ₹2000 a day, or roughly ₹60,000 a month. While the merchants previously had no reason to refuse UPI, they now have a financial incentive to nudge customers back towards cash, creating a significant reversal risk for digital adoption. Some trade bodies — including the All India Petroleum Dealers Association, the Retailers Association of India, and apparel groups — have already warned that thin-margin members will be forced to switch to “cash-only” above ₹2,000.
As the risk of reversal to cash transactions is real, it will entail significant costs to the banking system, and this has two elements. First, the banking system enjoys an enormous interest-free and low-cost current account and savings account (Casa) float. Every rupee that stays in a savings or current account and moves via UPI, instead of being withdrawn as cash, is float for banks. Indian banks enjoy 40-45 per cent Casa deposits at low cost, trillions of rupees of low cost funds, contributed significantly by UPI by making it convenient not to withdraw cash.
Second, handling cash is expensive, with industry estimates putting the all-in cost to banks — currency chest operations, sorting, storage, transport, security and ATM replenishment — at ₹20 to ₹30 per transaction. ATM replenishment alone is estimated at about two-thirds of that, in the range of ₹14 to ₹17 per withdrawal. A UPI transaction costs far less than that. If merchants start nudging customers towards cash to avoid 0.4 per cent, customers will revert to cash. Banks will lose that low-cost Casa float and incur the cost of handling cash again. It is a net loss to the banking system, not a gain. There are also larger implications that go beyond banks.
First, for the economy, UPI was a medium to bring small traders into formal finance. Levying a fee may drive small traders back to informal cash.
Second, for the government, if currency with the public rises even by even 1 per cent of GDP due to UPI avoidance, that would mean about ₹3.5 trillion leaking out of bank deposits at current annual GDP. It would also mean printing and handling more currency, more counterfeit notes, and higher costs, resulting in lower profits for the RBI and, in turn, lower transfers to the government.
Third, it also has implications for monetary policy. Monetary transmission works better when money stays as deposits rather than as cash, because cash is outside the influence of interest rates. UPI helps keep money in deposits by making it unnecessary to withdraw cash. If charging for UPI transactions pushes people back to cash, currency leakage from the banking system will increase, which weakens monetary transmission.
India built a state-of-the-art public payment infrastructure that has brought significant benefits to the common person, the banking system, the RBI, the government and the wider economy, far outweighing the costs of managing it. Let’s not fritter away its enormous benefits to the economy for a few hundred crores of fee income.
The writer is senior fellow at the Centre for Social and Economic Progress, New Delhi. The views are personal
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