India is currently in negotiation with 18 other countries in order to establish cross-border CBDC payments. You might wonder why, let us see if we can figure it out.
Backstory
In order for us to try and make sense of this play for a bigger piece of the global trade pie we first have to have some context. India is part of a five-nation group known as BRICS. And the name is simply the first letter of each country. And Bis for Brazil, R for Russia, I for, you guessed it India. C is for China and the newest member of the group is S and which stands for South Africa.
Current and former leader of the BRICS nations
If it seems like a strange group of countries that do not really have much in common, I can not agree more. The term was originally coined back in 2001. Back then it was only four countries, BRIC. But in 2010 a fifth member was added to the group, South Africa. And it is but one thing that unites these 5 countries. And that is they are the fastest growing economies believed to dominate the global trade in 2050.
This group formed by these five countries has actually increased their cooperation. Even the relationship between some of the countries still is far from great. As an example, there are still ongoing border skirmishes between India and China over a disputed part of their joint border in the Himalayas region. But on the other side, China also provides India with most of its armed as well. But unlike China who more or less have sided with Putin, India has stayed neutral. Allowing them to still trade freely with Russia, buying discount oil as an example. All in all, I would say the group has benefitted its member.
Reserve currency
For the last millennials, we have had a reserve currency. Be it the Greek drachma, the Venetian ducat, and the Florentine florin or the most recent one. The US Dollar. There are some things that allow a currency to reach the status of a reserve currency. It is as close to a final evolution or reaching a power level over 6000 as a currency can get. And probably the wet dream of most Central Bank directors.
Florentine florin, 1347
The criteria however are hard to achieve, making it very hard for a new currency to displace an old one. There are two base criteria as I see it, the first one being the currency has to be readily available. Meaning if you don't have it or have easy access to it. It is probably not a reserve currency. The second criteria is that it has to have a stable value. This means that in countries with a very unstable economy, and a raging inflation. This reserve currency is often preferred over even the national currency. Simply because people know that the value of the reserve currency is stable. They can still buy the same amount of food when they wake up the next day as they could when they went to bed the evening before.
While that's all good. You might ask yourself what the purpose of a reserve currency is. Its purpose is to allow people or countries to easier trade with each other. If country A wants to buy something from country B. They need to have country Bs money in order for them to buy it. Because they are buying it in country B. And the traditional way to do that is to wait for someone in country B who wants to buy things for a somewhat equal value. When that is the case, both countries send the things and pay their local vendors in their native currency.
If this is two countries that have a large volume of trade going back and forth, this is not really an issue. But is one of the countries that have very little or no trade with the country they want to buy things from. It becomes a problem. One way to get around it is to sell things at a discount. But that is not sustainable in the long run. Another way is to trade with country C and have them pay you in the reserve currency. Now you have the reserve currency you can use to buy things from in country B. And because it is widely available, and has a stable value. Country B sees it as no problem because they know that they can use this reserve currency in almost any other trade they want to make as well. That is how a reserve currency helps to facilitate global trade between countries. Barebone version.
For a breakdown of the Russian numbers before and after the invasion go to the source of the picture here
With a reserve currency also comes immense power. That is if the country that controls the reserve currency says that another country no longer can use it to trade. Then they are forced to go back to the much less desirable version of trading with discounted goods. Unless they are trading with a country they have a large trade volume with. And this is what happened to Russia after they invade Ukraine. The US cut them off from using the USD to trade. This then has led Russia to discount their oil and gas to anybody willing to still trade with them. Like China, India, Pakistan, and Brazil to name a few. This then so that Russia in their turn can import things they need for the war.
India percent day
There have been cries for a new reserve currency. And there has even been some talk about BRICS joining forces to put out their own. And last year there where a report that China, Russia, and Saudi Arabia were looking to join together and put out a competing alternative to the USD. But so far it has been nothing more than talk. Talk and cries that the US has too much global power thanks to the USDs status as a reserve currency. But as long as the vast majority of countries agree with US politics, not much is going to change. But this can lead to financial opportunity. Enter India.
What India is trying to do is leverage other positions as a neutral country. Meaning they have no trade restrictions on them like Russia or China currently have placed upon them. This makes India, presumably, a more interesting trading partner to many countries that could be caught in the crossfire of the global power struggle between US, China, and Russia.
But cross-border payments will also become much quicker, more seamless and very cost-effective. That is another area where a lot of attention needs to be given. We are constantly in dialogue with other central banks that have introduced or are introducing CBDCs. -RBI Governor, Shaktikanta Das
India has seen that there are several countries currently struggling. Some are even on the brink of collapse like Sri Lanka. Where a combination of bad government decisions and no USD to enable them to buy goods led to a combustible situation. And now people are struggling to buy food and other necessities. And according to the report, 18 countries have opened these types of accounts since mid-2022. In March of this year, India and the United Arab Emirates announced they were doing a joint study of cross-border payment solutions.
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Another added benefit for India is that shifting more and more trade to their own native currency both strengthens it globally as well as allows them to not spend as much USD. And while India says they have no lack of USD currently. Things can shift fast in the global landscape. And who knows, if India keeps this up by 2050 we might all be looking at prices in Rupees instead of Dollars.
I hope that you found this look at the current events unfolding in Inda as interesting as I have. And hopefully, you might even have learned a thing or two. =) If you have any thoughts on this topic please share them with me in the comment section below. I am looking forward to hearing what you have to say.
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