Amid rising global moves to reduce reliance on the US dollar, US President-elect Donald Trump recently threatened BRICS nations with tariffs over efforts to explore a new currency. With BRICS nations pushing for financial reforms, India faces the challenge of balancing its economic priorities while avoiding undue dependence on any single power.
Important Themes Relevant For UPSC
Here are brief descriptions of the important themes in the article, relevant to the UPSC Prelims and Mains exams:
SWIFT Network And Its Significance
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a global messaging system facilitating secure and standardized international financial transactions among over 11,000 institutions in more than 200 countries.
The U.S. has previously leveraged SWIFT to enforce sanctions, notably disconnecting Iranian banks in 2012 and certain Russian banks in 2022, effectively isolating these nations from the global financial system.
US Dollar As A Global Reserve Currency
The U.S. dollar has long been the dominant global reserve currency, accounting for a significant share of international trade and central bank reserves.
However, BRICS nations (Brazil, Russia, India, China, South Africa) have explored creating a new reserve currency to reduce dependence on the dollar, aiming to enhance financial sovereignty and mitigate risks associated with U.S. economic policies.
RBI’s Steps For Internationalization Of The Indian Rupee
In 2022, the Reserve Bank of India (RBI) initiated measures to promote the Indian rupee in global trade by allowing international trade invoicing and payments in rupees.
This move aims to reduce reliance on the U.S. dollar, facilitate smoother trade with countries under Western sanctions, and bolster the rupee’s status as an international currency.
IMF’s COFER Data On Reserve Currencies
The International Monetary Fund’s Currency Composition of Official Foreign Exchange Reserves (COFER) data indicates a gradual decline in the U.S. dollar’s share of global reserves.
Simultaneously, there’s an increase in non-traditional reserve currencies like the Chinese renminbi, Australian dollar, and Canadian dollar, reflecting a diversification in global reserve holdings.
India-Russia Trade Dynamics And Rupee Reserves
Post-Ukraine conflict, India’s oil imports from Russia surged, leading to a trade imbalance. India’s exports to Russia stood at $4.2 billion in FY24, while imports, primarily oil, reached $61 billion.
This disparity resulted in Russia accumulating substantial rupee reserves, which it has struggled to utilize due to limited avenues for spending rupees internationally.
India’s Approach To Dollar Dominance And Trade Diversification
India is diversifying its trade mechanisms to reduce over-reliance on the U.S. dollar, not as an anti-American stance but to promote a multipolar financial system.
Initiatives include promoting the rupee in international trade and developing digital financial platforms like the Unified Payments Interface (UPI) to enhance financial autonomy.
China’s Role In BRICS Financial Initiatives
China is actively promoting alternatives to the U.S.-led financial system within BRICS, including proposals for a BRICS currency and cross-border payment systems.
However, there’s caution among other BRICS members, including India, to ensure these initiatives don’t disproportionately favor China, given its economic clout within the bloc.
Development Of India’s Digital Currency (CBDC) And Financial Platforms
India is advancing the development of its Central Bank Digital Currency (CBDC) and expanding platforms like UPI to facilitate seamless international transactions.
These efforts aim to position India as a leader in digital finance within BRICS and reduce dependency on traditional global financial systems.
For India, the ideal strategy is to strike a balance by backing financial reforms within BRICS that serve its interests while preserving strong relations with the US to protect its broader strategic and economic goals.
India should pursue diplomatic dialogue with the US to clarify its stance, highlighting that diversifying trade mechanisms is not an anti-American move but a step toward promoting multipolarity and financial stability.
Geopolitical Implications Of U.S. Sanctions And BRICS Responses
The U.S.’s use of financial sanctions, such as disconnecting countries from SWIFT, has prompted BRICS nations to seek alternatives to mitigate economic vulnerabilities. This includes exploring new payment systems and reserve currencies to enhance economic resilience against unilateral sanctions.
Facts At A Glance
International Financial Systems and Currencies
- SWIFT: Society for Worldwide Interbank Financial Telecommunication, a global financial messaging system.
- US Dollar Dominance: Accounts for 88% of global forex turnover and over 90% of global trade settlements.
- Indian Rupee: Represents 1.6% of global forex turnover; non-US and non-Euro currencies make up 4%.
- IMF COFER Data: Decline in US dollar reserves; rise in non-traditional reserve currencies like renminbi, Australian dollar, and Canadian dollar.
- BRICS Initiatives: Exploring new currencies to reduce reliance on the US dollar; 90%+ Russia-China trade in domestic currencies.
India’s Efforts in Trade and Currency
- India-Russia Trade: Post-Ukraine war, oil imports from Russia surged, causing a trade imbalance.
- Steps to Internationalise Rupee: RBI allowed rupee invoicing and payments in 2022 to reduce dollar reliance.
- Digital Currency Development: India is focusing on CBDC and expanding platforms like UPI globally.
Geopolitical and Economic Trends
- US Sanctions: Barred Iran (2012) and Russia (2022) from SWIFT, pushing alternatives to the dollar.
- Russia-China Trade: $240 billion trade in 2023 settled mainly in roubles and yuan.
- Multipolar Currency System: IMF notes a rise in non-traditional reserve currencies.
- India in BRICS: Supports local currency trade but seeks a balanced framework to avoid favoring China.