Internationalize the rupee while a BRICS currency loses traction

Earlier this month the Reserve Bank of India (RBI) released a report on the rupee’s internationalization. If our currency is used to settle our export/import transactions, it shifts exchange-rate risk to our counterparts, which is a big plus for our firms. In parallel, there has also been talk about a BRICS (Brazil, Russia, India, China and South Africa) currency along special-drawing-rights lines. We should focus on popularizing the rupee as a means of bilateral exchange ahead of a BRICS currency. For the latter to succeed, the national currencies of all members must first have mutual acceptance within the group and also internationally.

Why is there so much discussion about moving away from the US dollar’s hegemony in international transactions? The USD has been the world’s de facto reserve currency since 1944, first under its gold-exchange standard and since 1971 in the era of the floating exchange rates. Recent data released by the International Monetary Fund shows that the USD’s share of world reserves was 59.0% during January-March 2023, up slightly from the previous quarter.

For BRICS countries, the de-dollarization of world financial markets is a means to enhance economic autonomy and reduce exposure to external economic shocks. The US’s recent use of economic sanctions as a foreign policy tool against Russia has upped its appeal.

For over a decade, BRICS have mulled a currency styled on the International Monetary Fund’s SDRs, which are allotted to its member countries to help cope with emergency requirements. SDR’s value is based on a basket of five currencies: the US dollar, euro, Chinese renminbi, Japanese yen and the UK’s pound sterling.

An SDR-style reserve with BRICS currencies managed by themselves would need complete trust among the countries of this bloc. But marked differences in foreign and trade policies prevail among them, especially between India and China. Till recently, New Delhi refused to settle trade with Russia in yuan. As per media reports, India now pays 10% of oil imports from Russia in yuan. New Delhi and Moscow recently suspended talks on settling their bilateral trade in rupees. Also remember, India did not join the Regional Comprehensive Economic Partnership (RCEP), fearing that a trade imbalance with China could lead to a surge in imports. Nonetheless, India’s bilateral trade deficit with China has been ballooning and is expected to have touched $1 billion in 2022-23. BRICS citizens would also have to be ready to trade in the BRICS currency rather than USD or euro. Given how the latter two serve as stores of value, would Indian traders want to do that?

Critics of the US point out that the USD’s share of central banks’ reserves is now the lowest in over two decades. Yet, as Hartley (bit.ly/3XYI7UP) notes in a paper, the share of USD in central banks’ reserves was even lower in 1990, at just 50%. The paper also notes that the USD dominates multiple exchange transactions internationally, be it the invoicing of trade, foreign-exchange transaction volumes or the denomination of global debt securities. For example, over 80% of emerging market debt remains denominated in foreign currency and almost entirely in USD.

For a country’s currency to achieve such world dominance, its economy must be large, open to free trade in goods and services, and also open to flows of foreign investment in and out. It must have a deep financial market and its banks should have a significant presence worldwide. The country should have low and stable inflation and a credible fiscal policy that supports confidence in the currency’s value.

None of the BRICS countries fulfils all of these criteria, and some do not fulfil any. Full capital account convertibility is not in sight for China, India or Russia, to name just three. The economic performance of the BRICS club in recent years and size of their economies has been uneven. The share of BRICS output in the global economy increased to 26% (in constant 2015 USD) in 2021 from 19% in 2010. Excluding China, however, it is just 7%. The joint share of Brazil, Russia and South Africa together has fallen by 1 percentage point to 3% of global output over this period.

Inflation erodes the value of a currency as a store of value. The inflation and interest rate scenarios across BRICS countries vary widely. Brazil has one of the highest interest rates among larger economies, currently at 13.75%, whereas China’s interest rate of 3.65% is the lowest among BRICS countries and even lower than the Eurozone’s and American economy’s. Harmonizing these divergences would be a pre-condition for a BRICS currency, and the challenge is steep.

What is India’s best way ahead? First, we must continue to work on bilateral trade settlement agreements (like how Russia-China trade takes place). The USD’s share in Russia-China bilateral trade settlement has fallen to less than 50% from nearly 90% in 2015. Second, focus on becoming a large economy so that other big countries would want to trade in rupees. This calls for a significant rise in India’s share of world trade in merchandise from below 2% currently. In the meantime, the US dollar’s status as the predominant global reserve currency is set to continue.

Vidya Mahambare & Praveen Kumar are, respectively, a professor of economics and director (research), and graduate of Great Lakes Institute of Management, Chenni