BRICS Local Currency Advocacy

The advocacy for the use of local currencies in trade and financial transactions among the BRICS nations represents a significant shift in the architecture of international finance. BRICS—comprising Brazil, Russia, India, China, and South Africa—has increasingly emphasised reducing excessive dependence on dominant global currencies, particularly the US dollar, by encouraging settlements in national currencies. This initiative has important implications for banking systems, financial markets, and the Indian economy, especially in the context of global economic volatility and geopolitical realignments.

Background and Rationale of Local Currency Advocacy

The idea of local currency usage within BRICS gained momentum after recurring global financial disruptions highlighted vulnerabilities associated with over-reliance on a single reserve currency. Exchange rate volatility, capital flow reversals, and external shocks have often transmitted instability to emerging economies through dollar-denominated trade and debt.
BRICS local currency advocacy seeks to:

• Enhance monetary sovereignty of member countries.
• Reduce transaction costs and currency conversion risks.
• Mitigate exposure to external sanctions and global liquidity tightening.
• Promote intra-BRICS trade and investment.

This approach aligns with broader efforts by emerging economies to reform the global financial system and make it more representative of multipolar economic realities.

Institutional Framework within BRICS

A major institutional pillar supporting local currency advocacy is the New Development Bank (NDB), established to finance infrastructure and sustainable development projects in member countries. The NDB has increasingly raised funds and extended loans in local currencies, setting a practical precedent for de-dollarised financing.
Additionally, BRICS summits and finance ministers’ meetings regularly emphasise cooperation among central banks, including currency swap arrangements and payment system interoperability. These institutional mechanisms provide the foundation for operationalising local currency settlements in trade and finance.

Implications for Banking Systems

The shift towards local currency transactions has direct implications for banking operations across BRICS countries. Banks are required to develop capabilities for cross-border settlements in multiple currencies, manage new forms of liquidity risk, and comply with evolving regulatory frameworks.
In India, commercial banks play a central role in facilitating rupee-based trade settlements with BRICS partners. This involves:

• Opening special vostro and nostro accounts.
• Managing foreign exchange exposure in non-dollar currencies.
• Enhancing compliance and risk management systems.

For banks, local currency advocacy offers opportunities to diversify foreign exchange operations while also demanding higher technical and operational preparedness.

Impact on Financial Markets

Local currency advocacy influences financial markets by encouraging the development of deeper and more liquid domestic bond and money markets. When trade and borrowing are increasingly denominated in local currencies, demand for domestic financial instruments rises, supporting market depth and resilience.
In India, greater use of the rupee in international transactions can:

• Strengthen the rupee’s regional and global profile.
• Encourage foreign participation in Indian debt markets.
• Reduce reliance on external commercial borrowing in foreign currencies.

However, increased international use of the rupee also requires stable macroeconomic fundamentals and credible monetary policy to maintain investor confidence.

Significance for the Indian Economy

For the Indian economy, BRICS local currency advocacy aligns with long-term objectives of financial stability and strategic autonomy. India is a large importer of energy, fertilisers, and capital goods, and settlement in local currencies can help manage foreign exchange reserves more efficiently.
Key economic implications include:

• Lower exposure to dollar shortages during global crises.
• Reduced impact of US monetary policy tightening on domestic liquidity.
• Improved trade competitiveness by lowering hedging and conversion costs.

The policy also complements India’s broader efforts to internationalise the rupee gradually, without exposing the economy to abrupt capital flow volatility.

Role of Monetary and Regulatory Authorities

The implementation of local currency advocacy requires active involvement of central banks and regulators. In India, the Reserve Bank of India plays a pivotal role in designing frameworks for cross-border rupee trade, currency swaps, and settlement mechanisms.
Regulatory support includes:

• Guidelines for invoicing, payment, and settlement in local currencies.
• Prudential norms for banks handling cross-border currency risks.
• Coordination with foreign central banks for liquidity arrangements.

Such measures ensure that the transition towards local currency usage does not undermine financial stability or regulatory oversight.

Advantages of BRICS Local Currency Usage

The advocacy offers several advantages for banking, finance, and the broader economy:

• Enhanced resilience against external financial shocks.
• Greater policy autonomy for domestic monetary authorities.
• Promotion of South–South economic cooperation.
• Support for long-term infrastructure financing in local currencies.

For India, these advantages are particularly relevant given its status as a fast-growing emerging economy with increasing global trade integration.

Challenges and Limitations

Despite its potential, BRICS local currency advocacy faces notable challenges. Differences in economic size, trade balances, and currency convertibility among BRICS members complicate implementation. The dominance of the dollar in global trade, finance, and reserves remains structurally entrenched.
Specific limitations include:

• Limited acceptability of some BRICS currencies outside regional trade.
• Shallow financial markets in certain member countries.
• Exchange rate volatility and hedging constraints.
• Need for high levels of policy coordination and trust.

These constraints imply that local currency usage is likely to expand gradually rather than replace existing global currency arrangements abruptly.

Geopolitical and Strategic Dimensions

Local currency advocacy also carries geopolitical significance. It reflects a collective aspiration among BRICS countries to reduce asymmetries in the international monetary system and enhance strategic autonomy. For India, participation in this initiative balances economic pragmatism with geopolitical considerations, allowing engagement without overtly disrupting existing global financial relationships.
The approach underscores India’s preference for incremental reform of global institutions rather than radical decoupling, consistent with its broader foreign economic policy.