Will UPI Stay Free Forever? | The Daily Brief #195

Summary

In this episode, Anurag Bansal delves into two important stories. First, the Payments Council of India (PCI) urges Prime Minister Modi to reconsider the zero Merchant Discount Rate (MDR) policy for UPI and Rupee debit cards, arguing that it is unsustainable for digital payment providers. They propose a modest MDR for larger merchants to help cover infrastructure costs without burdening smaller businesses. Second, Bansal discusses the recent strengthening of the Indian Rupee, driven by improved trade conditions and lower-than-expected inflation, but highlights potential risks like US tariffs and India's growth outlook. The episode explores key issues affecting India’s financial landscape.

Takeaways

• 😀 PCI (Payments Council of India) wrote to Prime Minister Modi on March 24, 2025, demanding the removal of the zero MDR policy for UPI and Rupee debit cards.
• 😀 The zero Merchant Discount Rate (MDR) policy was introduced in January 2020 to encourage digital payments by eliminating transaction fees for merchants using UPI and Rupee debit cards.
• 😀 UPI's success in India has been significant, but the zero MDR policy has left payment providers without a direct way to recover costs for maintaining infrastructure.
• 😀 It is estimated that maintaining UPI infrastructure costs around 10,000 crore rupees annually, far more than the government's current incentives.
• 😀 PCI argues that if payment providers don't generate enough revenue, they may start charging hidden fees or engage in practices like selling user data, which could compromise the system's transparency.
• 😀 PCI proposes a modest MDR (0.3%) for larger merchants (with turnover over 20 lakh rupees), while small merchants would remain exempt.
• 😀 Introducing a small MDR could help cover infrastructure costs without burdening smaller shops or reversing the progress of financial inclusion in rural areas.
• 😀 The Indian rupee recently strengthened, moving from 87.4 to below 86 rupees against the US dollar, marking a significant shift in currency markets.
• 😀 A stronger rupee makes imports cheaper but can hurt exporters by making Indian goods more expensive for foreign buyers.
• 😀 Positive factors behind the rupee's recent performance include strong services exports, reduced imports of gold and oil, lower-than-expected inflation, and a recent influx of over $1 billion into India.
• 😀 While there are risks such as potential tariffs from the US, slower-than-expected growth, and the RBI's management of foreign reserves, there are also optimistic signs such as tax cuts and predicted interest rate cuts from the RBI.

Q & A

What is the main purpose of the Payments Council of India (PCI) writing to Prime Minister Narendra Modi?

The PCI, which represents over 180 digital payment companies, wrote to the Prime Minister asking to remove the Zero Merchant Discount Rate (MDR) policy for UPI and Rupee debit cards. They are concerned that Zero MDR is unsustainable and hinders the infrastructure required to maintain the payment system.

What does the Zero Merchant Discount Rate (MDR) policy entail?

The Zero MDR policy means that merchants are not charged a fee for processing digital payments via UPI or Rupee debit cards. This was introduced to promote digital payments, especially in smaller and rural markets.

Why was the Zero MDR policy implemented in India?

The Zero MDR policy was implemented to encourage digital payments by making transactions free for merchants, thus facilitating wider adoption of UPI and Rupee debit cards across the country, particularly in smaller and rural areas.

What are the potential consequences of continuing the Zero MDR policy, according to PCI?

PCI argues that continuing the Zero MDR policy might lead to payment companies seeking alternative and potentially less transparent revenue sources, such as hidden charges, data sales, or advertisements, instead of the clear transaction fees.

How does the PCI propose addressing the issue of Zero MDR while still promoting digital payments?

PCI suggests reintroducing an MDR of 0.3% for larger businesses with turnovers over ₹20 lakh while keeping smaller merchants exempt from the fee. This could help cover the cost of infrastructure without burdening small traders.

What impact might reintroducing an MDR have on consumers?

Reintroducing an MDR for larger merchants could potentially lead to higher prices for consumers if businesses decide to pass on the fee. However, if the fee is modest and only affects larger businesses, it might not significantly impact consumers.

What is the current situation with the Indian Rupee against the US Dollar?

The Indian Rupee recently strengthened, moving below 86 from around 87.4 against the US Dollar, which was an unexpected positive shift in the currency markets.

What factors contributed to the strengthening of the Indian Rupee?

The Rupee strengthened due to a weaker US Dollar, improved trade balance (with strong services exports and reduced imports of gold and oil), and better-than-expected inflation figures, which led to speculation about potential interest rate cuts by the Reserve Bank of India (RBI).

What risks remain for the Indian Rupee despite its recent strengthening?

The main risks for the Indian Rupee include potential US trade tariffs, slower economic growth, and actions by the Reserve Bank of India (RBI), such as buying dollars to rebuild foreign reserves, which could weaken the Rupee.

What are some positive developments for the Indian economy that have helped the Rupee's performance?

Positive developments include a reduction in imports of gold and oil, strong services exports, lower-than-expected inflation, and a recent inflow of over a billion US dollars due to global equity market rebalancing.