Syllabus: Indian Economy and issues relating to planning, mobilization of resources, growth and development
RBI’s Proposal at BRICS
- The Reserve Bank of India has advised using CBDCs for BRICS cross-border payments.
- The suggestion targets India’s BRICS chairmanship in 2026 as a diplomatic opportunity.
- The system would include founding and new members like Egypt, UAE, Iran, and Indonesia.
- The proposal aims to create a multi-country digital payment network beyond traditional systems.
Understanding Central Bank Digital Currencies
- CBDCs are legal tender issued digitally by central banks, backed by sovereign authority.
- In India, the e-rupee operates as a digital store of value in a separate wallet.
- Transactions occur wallet-to-wallet, unlike UPI’s bank-account-based transfer mechanism.
- Each transaction is recorded on a blockchain digital ledger, ensuring traceability.
- CBDCs differ from cryptocurrencies, as they have a central issuer and fixed value.
Advantages for Cross-Border Payments
- Blockchain transparency makes transactions permanent, visible, and resistant to manipulation.
- The system can help track black money and money laundering routes in international payments.
- CBDCs can be programmable, allowing usage restrictions based on location or merchant category.
- Trade with Iran and Russia, restricted by SWIFT exclusion, could become more feasible.
- Digital payments reduce reliance on national currencies and complex settlement mechanisms.
Potential Risks and Constraints
- Legal and regulatory harmonisation across BRICS countries may take several years.
- Technical coordination among central banks could delay operational deployment of the system.
- The United States has threatened tariffs against BRICS alternatives to the U.S. dollar.
- India already faces 50% tariffs, raising concerns about further trade retaliation.
- Policymakers must weigh geopolitical costs against long-term payment system benefits.
Strategic Implications
- The initiative could reduce dependence on dollar-based payment systems in BRICS trade.
- It may strengthen financial cooperation among developing economies.
- However, the move risks heightened trade tensions with major global economic powers.