(Kitco News) – The global trend of de-dollarization continues to gain steam as India is reportedly open to the idea of using national currencies to conduct trade and financial transactions with its fellow BRICS partners.
According to a report from Hindu BusinessLine, which cited an anonymous source, India is leaning towards accepting the proposal to conduct trade using national currencies as long as the decision is non-binding and they are free to choose which members it will do business with.
The second condition is crucial, the source said, as India has little interest in performing currency settlement with certain members of the BRICS bloc, including China.
“New Delhi is examining an appropriate response based on the extent to which it would benefit economically and diplomatically from the proposals without increasing its vulnerabilities vis-a-vis China,” the source told BusinessLine.
The proposals to use local currencies and the creation of a common BRICS currency are expected to be included in the agenda at the upcoming BRICS summit meeting on October 21-22 in Kazan, Russia.
During the BRICS summit in Johannesburg in August 2023, member states' Finance Ministers and Central Bank Governors were asked to consider the issue of local currencies, payment instruments, and platforms before the next summit.
According to the source, South Africa could soon host a meeting for these Finance Ministers and Central Bank officials to discuss the matter further, enabling them to get their messaging aligned and ready to present at the upcoming summit.
India reportedly had reservations about the use of national currencies for trading with BRICS partners due to its strained relationship with China but softened its stance after it was announced that the decision would be non-binding, allowing them to pick and choose who to trade with.
“It is each according to its comfort level,” the official said. “Within BRICS, if you agree for currency settlement, you may choose not to do with x country while doing with others. If India chooses not to do with China in yuan and rupee, it is okay. But it may do with other countries, for instance, the rouble or rand.”
The agreement will also allow member countries to use a currency accumulated from trade with one country in their dealings with another, so long as the participating countries agree to the currency settlement.
“For instance, Russia can ship out the surplus rupee that is collected in its vostro accounts in India, convert it into Brazilian pesos to pay Brazil for some transaction,” the official explained. “Or it can convert it into South African rand to make payment to South Africa.”
Regarding the creation of a common BRICS currency, the source said the matter will be a key focus at the summit.
“The BRICS currency will be a notional currency and not a currency in physical form,” the official said. “The issue is, how does one peg the value for it? Naturally, the value will derive from the value of all the currencies in the basket put together. Notionally, one gets the impression that the yuan is a dominant currency. So, it will have a greater weightage. India has to see whether that will be acceptable to it.”
India’s CBDC pilot surpasses 5 million users
In other currency-related developments out of India, Shaktikanta Das, the Governor of the Reserve Bank of India (RBI), told the crowd at a conference in Bengaluru on Monday that their retail central bank digital currency (CBDC) pilot has over amassed more than 5 million users, but said there should not be in any rush to roll out a system-wide CBDC.
“Actual introduction of CBDC can be phased in gradually,” Das said. “It is important to emphasize that there should not be in any rush to roll out system-wide CBDC before one acquires a comprehensive understanding of its impact on users, on monetary policy, on the financial system, and on the economy.”
The country’s plans for a retail and wholesale CBDC were first announced in the Finance Minister's budget speech in 2022, and the RVB launched pilots for both by the end of that year. By the end of 2023, the system saw at least one day when the retail CBDC hit one million transactions. According to Das, there are 16 banks currently participating in the retail CBDC pilot.
He also noted that the RBI has been in the process of testing offline payments and programmability, a key function since parts of India suffer from a lack of reliable internet infrastructure.
“The programmability feature of CBDC could serve as a key enabler for financial inclusion by ensuring delivery of funds to the targeted user,” Das said. He provided a couple of examples of pilot projects currently being tested.
“Tenant farmers often find it difficult to access agricultural credit for inputs and raw materials as they do not have the land title to submit to the banks,” he said. “However, programming the end use for purchase of agricultural inputs can give the required comfort to banks and thus establish the identity of a farmer not through his land holding but through the end use of funds being disbursed.”
“Yet another path-breaking use case is farmers getting purpose-bound money through programmable CBDC for the generation of carbon credits,” he added. “Other new use cases aimed at testing features such as anonymity and offline availability are proposed to be rolled out gradually.”
Das said the pilots serve the vital role of providing the understanding needed to see how the launch of a CBDC would affect the broader economy. “Such understanding would emerge from generation of user data in pilots. Actual introduction of CBDC can be phased in gradually,” he said. “ Undoubtedly, CBDC has the potential to underpin the payment systems of the future, both for domestic payments and also cross-border payments.”
He noted that bringing efficiency to cross-border payments is a key agenda piece for G20 nations, and CBDCs can help.
“With the emergence of Fast Payment Systems across countries and experimentation around CBDC, new possibilities are opening up to bring in greater efficiency to cross-border payments,” he said. “Maximum efficiency gains in such initiatives would come from ensuring inter-operability as a key design element.”
“Ideally, while the legacy payment systems should be able to connect to each other and so should the CBDC systems, one country’s legacy system should also be interoperable with another country’s CBDC,” he added. “Actual implementation of interoperability would pose challenges and may involve certain trade-offs. Technical barriers may be surmounted by using common (international) technical standards. Further, the governance structure or management framework for long-term sustainability would also need to be finalized.”
Das recommended the development of a “plug and play system which allows replicability while also maintaining the sovereignty of respective countries” to achieve “harmonization and interoperability among countries [that] may prefer to design their own systems as per their domestic considerations.”
“India has made some progress in this direction and would be happy to develop a plug-and-play system for the benefit of the community of nations,” he said.
