Syllabus :GS 2/IR
In News
- US President-elect Donald Trump warned the BRICS nations (Brazil, Russia, India, China, South Africa) with 100% tariffs if they create a new BRICS currency or replace the US dollar as the global reserve currency.
BRICS Currency and US Dollar Dominance:
- The BRICS nations, in light of rising geopolitical tensions and the shortage of US dollars, are exploring alternatives to the US dollar for global trade.
- Diverging economic structures, different monetary and trade policies, and other complexities make the creation of a common BRICS currency a long-term goal.
| Global Currency Trends: – The IMF’s COFER report shows a decline in the US dollar’s share in global reserves, while non-traditional currencies (e.g., Australian dollar, Chinese renminbi) are gaining market share. – Renminbi internationalization efforts by China are also advancing, but its share of reserves has stalled. |
India’s Approach:
- India is exploring integration into the recently launched BRICS Pay Card, designed to facilitate token retail payments, enhance tourism, and promote financial integration.
- India does not aim to displace the US dollar but seeks to address practical challenges like trade partners’ currency shortages, blocked financial channels, and issues related to “weaponized” currencies.
- Focus on Economic Diplomacy: India advocates for practical solutions such as settling trade payments in rupees, especially with countries facing dollar liquidity issues or sanctions.
- India acknowledges the stability provided by the US dollar and does not seek immediate de-dollarization.
- India’s Prime Minister Narendra Modi stressed that BRICS should not aim to replace global institutions.
Initiatives for Rupee Internationalisation
- Special Vostro Accounts: To facilitate rupee-based trade settlements, India has introduced special vostro accounts to mitigate exchange rate risk, reduce transaction costs, and bolster forex reserves.
- Targeting Global South: India aims to support countries with dollar shortages (e.g., Sri Lanka, Maldives) and those facing Western sanctions (e.g., Russia, Venezuela).
- Central Bank Digital Currency (CBDC): India is advancing its CBDC initiative to streamline cross-border payments, enhance security and transparency, reduce reliance on intermediary banks, and keep pace with the global digital economy.
Approach on US Dollar
- India’s External Affairs Minister Jaishankar stated that avoiding the US dollar is not part of India’s policy but efforts are made to find alternatives in specific cases due to US policies complicating trade with some countries.
- India does not have malicious intent towards the dollar, but supports a multipolar world reflected in currencies and economic dealings.
Challenges in Bilateral Trade with Russia
- Despite efforts, India’s trade with Russia in rupees remains low due to Indian banks’ fear of US sanctions and an imbalanced trade relationship with Russia.
- Russia has large reserves of rupees but uses them for investment in Indian stocks and bonds instead of settling trade.
- China’s angle : Trade between Russia and China in domestic currencies (rouble and yuan) has surged, with over 90% of trade now settled in these currencies.
Future of BRICS Currency and Global Financial Landscape:
- China might dominate BRICS currency initiatives, which could shift the power balance within the bloc.
- India should diplomatically engage with the US to explain its position and promote multipolarity.
- India should support financial reforms within BRICS but maintain strong ties with the US to balance its strategic and economic priorities.
- Efforts to promote digital currencies (CBDCs) and platforms like UPI could position India as a leader in the BRICS currency initiatives.
Source: IE
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