Toward a BRICS Currency: Reducing India\'s Reliance on the US Dollar

Introduction

Since the global financial crisis of 2007-2008, the US dollar has been questioned more than ever about its supremacy and its leadership position in the financial world. Since this crisis originated in the US, questions were raised about the reliability of the United States leadership and the wisdom of maintaining the dollar\'s dominance in the global financial system. As a result of this crisis, developing nations also gained more prominence and influence in global affairs. (Lund et al., 2018).

In 2009, Russian President Dmitry Medvedev convened the first BRIC (Brazil, Russia, India, and China) Summit in Yekaterinburg, to find solutions to \"navigate the crisis and establish a more equitable international system, as well as discuss the parameters for a new financial system to establish a more equitable international system and establish a more equitable financial system\". (Liu & Papa, 2022)

Following South Africa\'s membership in BRIC in 2010, these five nations formed BRICS, achieving policy coordination in more than 70 issue areas of concern (Kirton and Larionova, 2018; XII BRICS Summit Moscow Declaration, 2020). The most prominent achievements of the BRICS have come in terms of financial cooperation, notably the founding of the New Development Bank (NDB), the Contingent Reserve Arrangement (CRA), and several other financial coordinating instruments. These initiatives have had a major impact on the global economy, providing liquidity and stability to emerging markets. BRICS has also made significant strides in trade cooperation and other forms of economic cooperation. (Duggan et al., 2021)

Review of Literature

Liu & Papa. (2022) found that the BRICS countries have made major efforts to decrease currency risk and circumvent US sanctions through de-dollarization. The authors built a framework called \'Pathways to De-dollarization\' to examine the institutional and market processes established by BRICS nations at the BRICS, BRICS Plus, and sub-BRICS levels. They found the coalition\'s leaders and adherents, assessed its strength, and analysed how BRICS recruits new members. According to the research, the BRICS\' coalitional de-dollarization initiatives have created critical infrastructure for a prospective non-dollar global financial system. This means that, while implementing a unified currency among these nations would be difficult, there is a growing desire among BRICS members and other developing countries to reduce their reliance on the US dollar.

Aggarwal. (2020) The paper highlights that the de-dollarization of intra-BRICS trade faces three primary challenges: 1) the absence of an independent credit monitoring mechanism within the Contingent Reserve Arrangement (CRA), 2) The fluctuation in currencies causing uncertainty during conversions, 3) and the absence of a neutral commodity exchange. To address these issues and to promote the use of BRICS currencies, a phased solution based on smart contracts has been proposed. This approach involves developing more efficient intra-BRICS exchanges, inter-bank financial markets, incorporating smart contracts for trade finance, currency hedging, and commodity trading. BRICS traders act as counterparties to contracts in this closed ecosystem, reducing speculative risks and fostering trust among BRICS central and commercial banks. This promotes the use of national currencies in commercial transactions. Finally, the goal of these exchanges is to reduce the need for IMF-linked arrangements and de-dollarize currency swaps inside the CRA, while also potentially stabilizing exchange rates by raising demand for BRICS currencies. Furthermore, smart contracts may improve confidence in different BRICS finance flows, including reciprocal intra-BRICS infrastructure investments and loans.

Objective of the Study

The goal of the paper is to look at the potential implications and advantages of a BRICS currency on the financial system, international trade, and the geopolitical landscape, as well as the motivations for the BRICS countries\' interest in creating a common currency and the challenges and opportunities that such a currency would present.

The US Dollar Dominance

The US dollar has been the world\'s primary reserve currency for decades. This pre-eminence confers major economic and geopolitical advantages on the United States. The majority of international transactions, including commodity trading such as oil, are performed in US dollars. As a result, governments throughout the world must keep considerable dollar reserves to enable international commerce, giving the United States a disproportionate influence in global finance and politics. (Arslanalp et al., 2022)

Figure:1 Foreign Currency Assets of India

Source: Reserve Bank of India

From fiscal year 2001-02 through fiscal year 2022-23, India\'s Foreign Currency Assets, measured in millions of US dollars, have followed a dynamic trend. Starting at $51,092 million in 2001-02, their assets grew rapidly until reaching a significant $299,147 million in 2007-08. The global financial crisis of 2008-09, on the other hand, had a significant influence, producing a drop of $241,597 million. The years that followed saw a period of recovery and instability as India\'s Foreign Currency Assets reacted to changing global economic conditions. From 2015-16 onwards, these assets had a constant increase, topping $500 billion in 2020-21 at $537,953 million. The most current information for 2022-23 shows relative stability at $509,691 million as depicted in Fig. 1.

Many emerging economies, like India, use the buildup of dollar reserves to control currency rate volatility and offer a cushion against financial shocks. The US dollar\'s dominance in India\'s foreign currency assets reflects the dollar\'s worldwide standing as a major reserve currency and international commerce medium. This reliance on the US dollar exposes the Indian economy to the risks associated with currency volatility and changes in US monetary policy. This highlights the significance of diversifying India\'s foreign currency holdings and decreasing its reliance on the US dollar.

The BRICS Currency

The BRICS currency is a proposed inter-country currency involving the countries of Brazil, Russia, India, China, & South Africa. The BRICS currency is intended to provide a united and stable currency to promote economic growth and development. The proposed currency would facilitate BRICS nations\' transactions, commerce, and investments. Despite their combined GDP leadership, the BRICS economies remain vulnerable to the US currency. The introduction of a new currency would minimize reliance on the US dollar and other major currencies. (Tisch, 2023)

Brazil\'s President presented the suggestion for a BRICS currency at a BRICS meeting in Johannesburg. The goal is to lessen their reliance on dollar exchange rate volatility. If a BRICS currency were to be developed, its value would most likely be based on a basket of the five-member nations\' currencies. The BRICS countries would need to agree on the specific makeup of the basket, although it would most likely contain the Brazilian \"Real\", Russian \"Ruble\", Indian \"Rupee\", Chinese \"Yuan\", and South African \"Rand\". And the BRICS currency will most likely be gold-backed and sponsored by the BRICS alliance.

The Benefits of a Potential BRICS Currency

The idea for a BRICS currency, which is supported by the BRICS member countries, offers various possible benefits that might have a substantial influence on the global financial environment. While the program is still in its early stages, these benefits give strong grounds for the BRICS countries to investigate it further.

• Reduced Dependence on the US Dollar: One of the main reasons for the BRICS currency is to reduce dependency on the US dollar. The BRICS countries, like many others, have long been exposed to the US dollar\'s dominance in international commerce and banking. They hope to diversify their assets and lessen sensitivity to swings in the market value of the US dollar by launching an alternative currency. (Koffler, 2023)
• Enhanced Financial Independence: A BRICS currency would provide member countries more financial autonomy. It would enable countries to conduct international commerce, resolve settlements, and engage in financial activities without the requirement for Western financial institutions\' intermediation or the usage of the US currency. This increasing autonomy is especially important when negotiating global economic issues and geopolitical conflicts. (Gupta, 2023)
• Resilience Against Sanctions: Financial restrictions implemented by Western countries have had a direct impact on the BRICS members. A shared currency might provide a barrier against such bans, allowing commerce and financial activities to go uninterrupted even in the face of external pressure. (Cele & Bowker, 2023)
• Facilitation of Intra-BRICS Trade: A unified currency among the BRICS members would facilitate commerce inside the group. It would eliminate the need for currency conversion and the related costs, making commerce between member countries more appealing. This might lead to stronger economic cooperation and group cohesion. (Shetty, 2023)
• Geopolitical Influence: The establishment of a BRICS currency reflects the bloc\'s expanding global power. As the movement gets pace, it calls into question the supremacy of Western nations and the international financial system based on the US currency. This change in the balance of power might have far-reaching geopolitical consequences. (Lippman, 2023)
• Financial Inclusion: The BRICS currency might help emerging economies gain greater financial inclusion. It would let these countries participate more actively in global financial transactions, trade, and investment, levelling the playing field and eliminating Western financial institutions\' dominance. (Savage, 2023)
• Currency Stability: By cooperating to construct and maintain a shared currency, the BRICS countries may jointly contribute to its stability. They may better coordinate monetary policies, regulate inflation, and handle economic difficulties, building trust in the new currency. (Singh, 2023)
• Global Multipolarity: The BRICS currency project is consistent with the larger trend of multipolarity in international affairs. It opposes the idea of a unipolar world ruled by a single currency and advocates for a more equitable allocation of economic power across states. (Fofack, 2023)

India\'s Stance on BRICS Currency

India\'s stance on the prospective establishment of a unified currency among the BRICS members has been ambiguous. While Brazil, Russia, China, and South Africa have expressed interest in developing a BRICS gold-backed currency, India has remained cautious and non-committal.

External Affairs Minister, Dr. S Jaishankar has stated that India has no intention of adopting a BRICS currency. He highlighted that the rupee will remain a national priority for India in the near future. Rather than looking for a new currency, India\'s major priority is to strengthen its existing national currency, the Rupee.

India\'s ambivalence arises from the country\'s unique economic and geopolitical position within the BRICS group. India aspires to safeguard and promote its national interests as one of the world\'s fastest-growing major economies and a crucial player on the international stage. It is reluctant to adopt actions that may erode its control over monetary policy and currency management.

In addition, India\'s cautious attitude is consistent with its aim for a multipolar international order. Rather than advocating for a single alternative currency, India appears to want a diverse and balanced international monetary system in which various currencies, including the Rupee, play important roles.

In essence, India\'s ambiguous position on the BRICS currency reflects the country\'s complicated economic and strategic reasons. While India recognizes the need for more financial autonomy and alternatives to the US dollar, it is wary of handing over control of its national currency and monetary policy to a supranational institution.

Challenges Looming Ahead

• Coordination and Trust Building: Creating a unified currency backed by gold necessitates a high level of cooperation and confidence among the BRICS countries. Each member country has its own economic interests, monetary policies, and economic development levels. Reaching an agreement on major issues concerning the new currency will be a difficult and time-consuming task.
• Monetary Policy Alignment: To secure the stability of a gold-backed currency, the BRICS countries\' monetary policies must be aligned. This involves coordinating the management of inflation, interest rates, and exchange rates. It will be a difficult balancing act to achieve such convergence while respecting each nation\'s autonomy over its monetary policy. (Zharikov, 2023)
• Infrastructure and Technology: The introduction of a new currency needs the creation of a strong financial infrastructure and technological systems to support its issuance, distribution, and management. To ensure the currency\'s seamless operation, the BRICS nations will need to invest considerably in these areas. (Zharikov, 2023)
• Global Acceptance: Gaining worldwide approval for the new currency is a daunting task. Because of the US dollar\'s established role in international commerce and banking, it is the currency of choice for many nations. Convincing countries to use the BRICS currency in international transactions will necessitate significant effort and diplomacy. (Koffler, 2023)
• Economic Stability: To inspire trust in the new currency, the BRICS members must secure the stability of their economies. This involves dealing with challenges like budgetary restraint, trade imbalances, and banking sector reforms. (Singh, 2023)
• Geopolitical Resistance: Western governments are expected to oppose the move to challenge the supremacy of the US dollar. Economic sanctions and geopolitical conflicts might be used to hinder the currency\'s success. (Lippman, 2023)
• Border Disputes and Geopolitical Tensions: India and China, two prominent BRICS members, have been embroiled in a longstanding border dispute in the Himalayan region. This dispute has led to sporadic military clashes, most notably in the Galwan Valley in 2020, resulting in casualties on both sides. The ongoing tensions and lack of a comprehensive resolution to the border issue create a complex backdrop for BRICS cooperation. (Doshi, 2023)

Conclusion

The BRICS nations have emerged as crucial participants in a period characterized by shifting tides of global finance and the search for greater financial autonomy. The idea for a BRICS currency backed by gold is a significant move toward eliminating reliance on the dollar & altering the international financial landscape.

This study has shown the rationale behind the BRICS countries\' desire in establishing a unified currency, highlighting possible benefits such as less reliance on the dollar, more financial independence, and resistance to sanctions. It has also shed insight on India\'s cautious position, which is steeped in complicated economic and geopolitical reasons.

However, significant hurdles lie ahead, including the need for cooperation among varied member states, monetary policy alignment, infrastructural development, and global acceptability. Furthermore, geopolitical opposition and current border issues highlight the challenges of BRICS collaboration.