The BRICS countries are keen to start using their local currencies for mutual settlements. At the seventh BRICS Summit in Ufa, Russia, there were suggestions from the host that almost 50 per cent of intra-BRICS trading could be invoiced in yuan, the leading currency in the group. The idea has been discussed at BRICS Summits for at least four years now. It is definitely a great political statement, particularly at a time when the Bretton Woods institutions — International Monetary Fund (IMF, or just the ‘Fund’) and International Bank for Reconstruction and Development (World Bank, or just the ‘Bank’) — have failed to react to the increasingly louder voices of developing countries in a rapidly changing global economic order.
India though, must consider what advantages this brings to its own trade and industry before agreeing to help China achieve the objective of slowly replacing the US dollar with the yuan as the reserve currency.
Besides, even though India’s own exchange rate is pegged to a basket of currencies, and not just to the US dollar, trading in the local currency does not add to efficiency purely from the monetary policy point of view, given the complexities of exchange rate management.
What trading in local currency essentially means is countries start invoicing their products to be exported in their own currencies. For example, India would invoice — or bill — its merchandise exports to Russia in Indian rupees. The settlement dates can be fixed by mutual consultation — they can be daily, weekly, monthly or quarterly.
But then, there is effectively no rupee-ruble currency market today. So in arriving at a rupee-ruble exchange rate, the reference again is the US dollar, because there are deep and liquid currency markets with strong demand-supply helping to discover a rupee-dollar exchange rate. At the end of the day, the dollar still provides the benchmark for currencies the world over — even though China, more than any other country, is keen to see it replaced.
Back in 2012, at the Fourth BRICS Summit in New Delhi, the five countries had signed two agreements to encourage trade in local currencies. The first agreement was to extend credit facility in local currency to each other; the second was to replace the US dollar as the main unit of trade among them. But the agreements have failed to encourage businesses to jettison the dollar — exports among the countries continue to be invoiced in the US currency.
In any swapping arrangement, the country with the weaker currency gains. India’s major exports to Russia have been engineering goods and pharmaceuticals. Russia has been in turmoil, with a monetary policy that has resulted in a weakened currency. The ruble has only depreciated vis-a-vis the rupee over the last couple of years. This means the Russians pay more for Indian products, and Russian goods are cheaper in India because fewer rupees buy more. Industry, therefore, has been lukewarm to the idea of local currency invoicing. Unless partner countries can draw advantages, trading in any currency other than the US dollar will not kick off.
From a more strategic point of view, it makes sense for India to have local currency invoicing arrangements mostly with countries with which it enjoys a surplus in bilateral trade. India suffers a huge deficit with China (See chart). With Russia and South Africa too, India runs a deficit. It has a small advantage with Brazil. A local currency swap arrangement with countries from whom India imports will only encourage more imports. This apprehension is also clear from India’s plan to have local currency trading arrangements with about 15-20 countries with whom it has a trade surplus. A high trade deficit of $ 48 billion with China, and Beijing’s policy of keeping its currency weak, will only exacerbate the unfavourable situation.
India’s exports to BRCS countries added to just $ 25 billion in 2014-15, less than a tenth of its total exports of $ 310 billion. Barring China, the other three countries — Brazil, Russia and South Africa — are not India’s natural trading partners. If China is excluded, BRICS exports are less than 5 per cent of India’s exports. And imports from these three countries are only $15 billion — compared to India’s total imports of $ 450 billion in 2014-15.