Recently the U.S. President-elect, Donald Trump, threatened BRICS (Brazil, Russia, India, China, South Africa) countries with 100% import tariffs if they create their own currency or back any existing currency to replace the U.S. dollar as the world’s reserve currency.

U.S. dollar’s status as the global reserve currency

• Global Acceptance: The dollar is widely accepted worldwide for trade, investment, and reserves, making it the preferred currency for international transactions.
• Global Trade Dominance: The dollar is heavily used in global markets, especially for commodities like oil, gold, and other key resources, which creates constant demand for it in international trade.
• Financial Markets: The U.S. has the largest and most liquid financial markets, making the dollar the go-to currency for international investments and central bank reserves. This liquidity ensures its dominance in global finance.       
• Stability: The U.S. economy’s stability, effective inflation control, and strong financial institutions build trust in the dollar, reinforcing its position as the global currency of choice.  

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Reasons for Demand for a New BRICS Currency

• Sanction Avoidance: Countries like Russia and Iran have faced sanctions from the U.S., limiting their ability to conduct trade in dollars. 
  • This has prompted them to seek alternatives to the U.S. dollar in order to avoid the risks associated with reliance on a single currency.
• Political and Economic Autonomy: Countries want to reduce U.S. influence over global financial systems, such as SWIFT and the International Monetary Fund (IMF), which are often used to impose sanctions and exert pressure on sovereign states. 
• Mitigating Concentration Risks: Nations seek to diversify their foreign reserves beyond the U.S. dollar, mitigating the risks associated with holding a large portion of their reserves in one currency.
• Strengthening Economic Cooperation: BRICS countries, with their growing economic power, have sought to enhance intra-group trade by using local currencies or a new BRICS currency, bypassing the U.S. dollar and reducing transaction costs.
• Enhancing Financial Integration: A common currency or payment system within BRICS could facilitate smoother trade and investment flows, and increase economic cooperation.
• Shift in Global stance: As the global economic center of gravity increasingly shifts towards emerging economies, there is a growing aspiration among non-Western and developing countries, such as India, to transition from a unipolar to a multipolar world. 

India’s Position on Currency and Trade

• Internationalisation of the Rupee: In response to sanctions and trade challenges, India has initiated steps to internationalize the Indian rupee, allowing payments for international trade in rupees. 
  • Efforts are being made for local currency trade integration among BRICS nations. 
• Trade Relations with Russia: India’s trade with Russia has shifted toward local currency settlements, although issues like trade imbalance and banking reluctance due to potential U.S. sanctions persist. 
  • Conversely, Russia-China trade is more balanced, with significant use of the ruble and yuan.    
• India’s Clarification on Dollar Usage: India’s External Affairs Minister clarified that while India seeks to find “workarounds” in trade with certain countries due to U.S. policies, it has never targeted the U.S. dollar or sought to replace it. 
• • India’s focus is on finding alternative solutions for transactions where dollar access is limited.

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Way Forward

• Caution in BRICS Financial Reforms
  • India should carefully monitor financial reforms within BRICS to ensure that China does not dominate the bloc’s economic direction.
  • Balancing interests within BRICS while preserving sovereignty and influence is key to avoiding asymmetry in economic power.
• Diplomatic Engagement
  • India must diplomatically engage with the U.S. to clarify that diversifying trade mechanisms and promoting local currencies is not intended to undermine the U.S. dollar but to foster global financial multipolarity and stability.
  • India should emphasize that its approach to trade reforms is cooperative, not adversarial, aiming for inclusivity rather than anti-Americanism.
• Future Financial Reforms
  • UPI Internationalization: India should expand the global reach of its Unified Payments Interface (UPI) to provide a reliable and accessible payment mechanism.
  • Central Bank Digital Currency (CBDC): Accelerating the development and implementation of the digital rupee will enhance India’s financial resilience and adaptability in global trade.
• Strengthening Strategic Balance
  • Maintaining robust ties with the U.S. while promoting local currency trade among BRICS will help India safeguard its strategic and economic priorities in a multipolar world.

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