India has rapidly embraced digital payments. From buying groceries to paying large bills, UPI has made transactions faster and reduced the need to carry cash.

But a new debate around Merchant Discount Rate (MDR) on certain UPI transactions has raised an interesting economic question: if digital payments become more expensive for merchants, could some businesses and customers gradually return to cash?

There is no clear evidence yet that this will happen on a large scale. However, RBI data offers an interesting picture: despite the rapid growth of UPI, the amount of currency held by the public has also been rising.

What Is MDR and Why Does It Matter?

Merchant Discount Rate, or MDR, is a fee associated with accepting certain digital payments. If a merchant has to bear an additional cost on UPI transactions, they could theoretically respond in several ways.

A merchant could absorb the cost, increase prices slightly, encourage customers to use another payment method, or in some cases prefer cash for certain transactions.

However, whether this actually happens on a significant scale will depend on the size of the charge, the type of merchant and how customers respond.

Cash Is Still Increasing Despite UPI

The interesting part is that the growth of digital payments has not eliminated the demand for physical currency.

According to the RBI data cited in the report, currency with the public stood at around ₹40.65 lakh crore on March 31, 2026.

By September 15, 2026, this had risen to approximately ₹42.10 lakh crore.

That represents an increase of roughly ₹1.45 lakh crore in about five and a half months.

On a year-on-year basis, currency with the public was also significantly higher.

This shows that the relationship between digital payments and cash isn't simply "more UPI means less cash."

UPI and Cash Can Grow Together

It may seem surprising, but there is no contradiction in having rapid UPI adoption alongside increasing cash holdings.

People may use UPI for everyday transactions while still keeping cash for emergencies, small businesses, travel, household expenses or transactions where digital payments are inconvenient.

Cash demand can also be influenced by factors such as economic growth, inflation, seasonal spending, informal-sector activity and precautionary savings.

Therefore, rising cash circulation by itself does not prove that people are moving away from UPI.

What Is the Cash-to-GDP Ratio?

Another useful indicator is the cash-to-GDP ratio.

It compares the amount of currency held by the public with the size of the economy.

According to the figures cited in the report, this ratio stood at around 12.1% in March 2026, compared with 11.7% a year earlier.

A higher ratio indicates that cash holdings have increased relative to the size of the economy.

But again, this statistic should not be interpreted as evidence that UPI adoption is reversing.

Could MDR Encourage More Cash Payments?

This is where the debate becomes interesting.

If accepting UPI becomes more expensive for certain transactions, some merchants could become less enthusiastic about digital payments.

For example, businesses handling a large number of high-value transactions could have greater incentives to compare the cost of UPI with other payment methods.

But the actual impact will depend on how the payment ecosystem responds.

If merchants absorb the cost, customers may notice little difference. If merchants pass the cost on to customers, customers may change their payment preferences. If the cost is negligible relative to the convenience of UPI, digital payments may continue to dominate.

So, at this stage, a connection between MDR and a future increase in cash demand remains a possibility rather than an established trend.

What About the Cost of Printing Currency?

There is another interesting dimension to this discussion: the cost of maintaining cash.

Suppose ₹1 lakh is held in ₹500 notes. That would require 200 notes.

If the reported printing cost is approximately ₹0.96 per ₹500 note, printing those 200 notes would cost around ₹192.

By comparison, the report estimates the operational cost of processing a ₹1 lakh UPI transaction at around ₹66.

However, these figures cannot be compared directly as the complete economic cost of cash is much broader than printing.

Cash also requires transportation, security, storage, sorting, distribution, ATM infrastructure and handling.

Therefore, the cost of cash to the financial system extends well beyond the price of printing a note.

The Bigger Economic Question

The real question isn't whether UPI will replace cash completely. It is whether India will continue moving toward a payment ecosystem where digital transactions and cash coexist.

UPI has transformed how Indians pay, but cash continues to have a role in the economy.

If digital-payment costs rise for certain transactions, some merchants may reconsider their preferred payment methods. Whether this translates into a meaningful increase in cash demand will only become clearer once consumers and businesses actually respond to the new pricing environment.

For now, the RBI data offers an important lesson: India's digital-payment revolution has not made cash disappear. Both digital payments and physical currency can grow at the same time.

The relationship between UPI charges, merchant behaviour, cash demand and the cost of maintaining currency will therefore remain an important economic trend to watch.