India's tightrope walk on Brics finance

The Brics summit next week will test India's ability to navigate the changing currency landscape as it seeks to de-risk from the dollar

India wants to de-risk itself from the US dollar-dominated global currency and financial system. But it also wishes to avoid provoking the United States’ ire by its participation in any so-called “de-dollarisation” initiatives.

 

It has taken the route of billing its actions as motivated by the desire to save on transaction costs entailed in currency exchange, achieving greater efficiency, and incorporating advanced technology in handling financial transactions. It is keen to showcase its own advances in digital payment systems and digital public infrastructure — or what’s called the India Stack. US President Donald Trump has threatened to levy 100 per cent tariffs on Brics countries if they are party to any initiative to create a Brics currency or to bypass the dollar financial ecosystem. This is one challenge.

 

The other is not to be drawn into an alternative China-led global currency and finance system of which the mBridge project is a centre-piece. This is a network of the central banks of China, the Hong Kong Monetary Authority, Malaysia, Thailand, the United Arab Emirates, and Saudi Arabia, who have linked their central bank digital currencies (CBDC) on a blockchain ledger system pioneered by China, to allow virtually instant cross-border financial transactions. The pilot phase of mBridge is now over and its commercial launch is imminent. This coincides with the convening of the Brics summit on September 12-13 in New Delhi and will influence its deliberations.

 

India has made two proposals. The governor of the Reserve Bank of India (RBI) said on August 10, “Cross-border payments is an area of interest for all of us, including the Brics, because we feel there is a lot of scope for reducing costs. Various options are on the table but it is still at a discussion stage, including CBDCs and linkage to fast payment systems.”

 

India is a founding member of NEXUS, a multilateral initiative that connects domestic instant payments systems globally to enable fast, secure and near-instant cross-border retail payments. NEXUS currently has Singapore, Malaysia, the Philippines and Thailand as other members.

 

It is reported that the European Central Bank is considering a proposal to link its own Europe-wide Target Instant Payment System (TIPS) with NEXUS.

 

NEXUS has been promoted and handheld by the Bank for International Settlement (BIS) Innovation Hub in Singapore. The mBridge project was also steered by BIS until it left in October 2024.

 

It appears that the RBI is recommending a NEXUS-like network for Brics as a parallel system. Since NEXUS incorporates Western compliance and regulatory provisions, it is unlikely to be of interest to China and Russia.

 

The BIS is involved in another parallel project, called AGORA, for linking CBDCs of G7-plus countries, including the Federal Reserve Bank of New York, the central banks of the United Kingdom, France, Japan, Korea, Mexico and Switzerland. In contrast to mBridge, AGORA has 40 private participants and the international messaging system for banks, SWIFT, is a member of the BIS working group designing the project. This is obviously a rival to mBridge, the big difference being that mBridge does away with the correspondent banking system, while AGORA is layered over it. mBridge enables escape from sanctions. AGORA seeks to retain that instrumentality.

 

One should consider mBridge as only one component of the Chinese efforts to achieve the internationalisation of its currency, the yuan. There are parallel institutional and procedural tracks.

 

One is the Cross-Border Interbank Payment System (Cips), which provides both an inter-bank messaging system like SWIFT and a clearing and settlement system. It does not seek to supplant SWIFT, but provides an efficient alternative, taking advantage of China’s role as the world’s largest trading nation and increasingly as a significant source of investment. It makes sense for partner countries to opt for yuan-designated transactions to avoid exchange risk. Increasingly Cips also avoids sanctions risk since, unlike SWIFT, it is not subject to US or Western regulation and control. This is why both Russia and Iran now use Cips almost exclusively for their cross-border financial transactions.

 

The Hong Kong-based South China Morning Post reported on June 11 that in early April, when

 

Mr Trump threatened to bomb Iran back to the Stone Age, Cips set a record for transactions in a single day, totalling $180.3 billion, almost double the daily volume of February. This was because more oil producing Gulf countries scaled up their share of yuan settlement, to de-risk from the US dollar. Yuan-denominated settlement accounted for a significant 41 per cent of West Asia crude oil trade with China in March. This trend is likely to continue.

 

A new development is China’s initiative to build a global network of gold vaults, taking advantage of the trend towards central banks holding larger proportions of their foreign exchange reserves in gold. The value of central bank gold reserves exceeded that of dollar reserves for the first time this year. The first offshore gold delivery vault was launched in Hong Kong last year under an agreement with the Shanghai Gold Exchange, with the Bank of China’s Hong Kong branch as its designated operator. The Shanghai Gold Exchange also launched its two yuan-denominated gold contracts, which can be settled either in gold or through bank transfer. The plan is to set up similar vaults in Singapore, Kuala Lumpur, Dubai, Riyadh and Moscow.

 

The Hong Kong Gold Exchange has entered into a partnership with China’s Alibaba to create a state-of-the-art platform for gold clearing and delivery.

 

This may also provide a work-around for promoting the internationalisation of the Chinese currency. If the yuan is freely convertible into gold and gold is internationally tradeable then, indirectly convertibility of the currency is achieved in practice.  

 

We are heading towards a world of multiple currencies and a-la-carte payment systems, with the dollar retaining an edge because of the depth of US financial markets and the legacy dominance of global banking and insurance by Western entities, which have deep interlinkages with the US. China has made significant in-roads into this financial plumbing of the world. The challenge for India lies in navigating this more complex landscape to its best advantage. The forthcoming Brics summit will test its navigation skills.

 

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The writer is a former foreign secretary