BRICS Currency Initiatives and the U.S. Dollar: Shaping a New Global Financial Order

Relevance to UPSC Syllabus

• GS Paper 2: International Relations – Role of global groupings like BRICS in influencing global economic order.
• GS Paper 3: Economic Developments – Monetary systems, trade systems, and their global implications.

Introduction

• Recent Developments: At the 16th BRICS Summit (October 2024), member nations deliberated on increasing local currency trade or creating a unified BRICS currency to reduce dependency on the S. dollar.
• S. Response: U.S. President-elect Donald Trump threatened 100% tariffson BRICS imports if they proceed with such plans, highlighting escalating tensions over the global financial system’s evolution.

U.S. Dollar’s Global Dominance

Key Factors Driving Dominance

• Global Acceptance: The U.S. dollar is widely used for trade, investments, and reserves.
• Trade Influence: Commodities like oil and gold are priced in dollars, creating constant demand.
• Financial Market Strength: The U.S. financial market is the largest and most liquid globally, attracting international investments.
• Economic Stability: Trust in the dollar stems from the U.S.’s robust financial systems and economic stability.

Trends in Reserve Currencies

• IMF Data:

• • The dollar accounts for 58% of global forex reserves (2023).
  • The share of non-traditional currencies like the Chinese renminbi, Australian dollar, and South Korean won is increasing.

Why BRICS Seeks Dollar Alternatives

1. Economic and Political Sovereignty

• Sanction Avoidance: Nations like Russia and Iran face restrictions due to dollar-centric sanctions like exclusion from SWIFT.
• Reduced U.S. Influence: Desire to move away from systems controlled by the U.S., such as the IMF and World Bank.

2. Cost Efficiency: Lower Transaction Costs: Using local currencies bypasses conversion through intermediary currencies, reducing trade costs.
3. Financial Risk Mitigation: Over-reliance on the dollar increases exposure to U.S. monetary policies, causing capital outflowsand economic instability in emerging economies.
4. Multipolar Financial System: Emerging economies push for a system that reflects the shift in global economic powertoward the Global South.

BRICS Initiatives

1. Local Currency Trade

• India-Russia Trade: Over 90% of bilateral tradeis conducted in rupees and rubles.
• China’s Currency Swaps: Bilateral agreements bypass the dollar (e.g., trade with Ethiopia).

2. Unified BRICS Currency

• Digital Currency Frameworks: Discussions on a BRICS digital currencyor payment system, such as BRICS Pay, to enable seamless trade.

 

3. Regional Currency Models

• South African Rand: Serves as a regional currency within the Southern African Customs Union (SACU).

Challenges to De-Dollarization

1. Chinese Dominance: Concerns about China’s disproportionate influence due to its larger economy within BRICS.
2. Limited Liquidity: BRICS currencies lack the global liquidityof the U.S. dollar, complicating international transactions.
3. Trade Imbalances: Nations like India face challenges in accumulating trade surplusesin local currencies (e.g., India’s imports from Russia exceed its exports).
4. Volatility Risks: Transitioning away from the dollar increases exchange rate volatility, disrupting investments and commerce.

India’s Stand and Initiatives

1. Rupee Internationalization

• Policy Steps:
  • RBI (2022): Allowed invoicing and settlements in rupees for global trade.
  • Over 19 countries have adopted rupee-based settlement mechanisms.

2. Balanced Diplomacy

• India clarified that its efforts to diversify trade mechanisms are not anti-dollar but aimed at ensuring trade resilience.

3. Strategic Use of Technology

• UPI Internationalization: India is expanding its Unified Payments Interface (UPI) to support global payments.
• Digital Rupee (CBDC): Accelerating the development of a Central Bank Digital Currency to enhance adaptability in global trade.

Potential Impacts of U.S. Tariffs

On BRICS

1. Increased Intra-BRICS Trade: Such tariffs may push BRICS nations to deepen trade ties, accelerating de-dollarization.
2. Import Diversification: Imports may shift to non-U.S. markets, reducing U.S. trade influence.

On the U.S.

1. Higher Consumer Costs: U.S. tariffs would drive up prices for domestic consumers.
2. Weakened Trade Leadership: Retaliatory measures from BRICS could reduce U.S. dominance in global trade.

Way Forward

Cautious BRICS Reforms

• India must ensure that BRICS currency initiatives do not disproportionately favor China and should address member-specific needs.

Diplomatic Engagement

• Maintain robust U.S.-India ties by clarifying that trade diversification promotes global financial stability, not anti-Americanism.

Accelerated Financial Reforms

1. Expand UPI’s global footprint to provide a reliable digital payment mechanism.
2. Expedite the launch of a digital rupee for seamless international transactions.

Strategic Trade Balance

• Address trade imbalances within BRICS by promoting Indian exports to these nations.

Conclusion

The BRICS efforts to reduce reliance on the U.S. dollar represent a paradigm shift in global finance, driven by aspirations for economic sovereignty and a multipolar financial system. India must:

• Balance its BRICS commitments with strategic ties to the U.S.
• Leverage its digital financial infrastructure to assume a leadership role.
• Ensure global trade mechanisms align with long-term national interests.

While the dollar remains dominant, these developments signify the emergence of a diversified global financial order.

MAINS QUESTION

The global financial system is witnessing a shift from dollar hegemony to a more decentralized order with initiatives like BRICS currency proposals. Critically analyse the impact of such a transition on global geopolitics and India’s foreign policy.