Will the BRICS push for de-dollarisation inadvertently benefit China?

No BRICS member has safe, liquid assets deep enough to back the basket except for maybe China.

As India prepares to host the 18th BRICS summit soon, the issue of de-dollarisation, that is, substituting the dollar as a currency of trade invoicing, payment settlement, and perhaps even as a reserve currency, has again gathered steam.

China and Russia have strategic motivations to undercut American hegemony within the larger global financial order, and hence the pursuit of de-dollarisation has a strategic appeal to them. Their struggles with holding dollar reserves and settling payments are widely documented, especially in the period since Russia invaded Ukraine.

India isn’t shielded from this form of vulnerability either. And nowhere is it more exposed than in the energy sector. India is a net importer of crude oil, meeting 88 per cent of its needs via imports, which further account for a fifth of India’s total imports. The fact that oil prices are pegged against the dollar renders India vulnerable, as any spike in oil prices, driven by recurrent instability in West Asia and prolonged sanctions on oil-producing nations, pushes the demand for the dollar, which can adversely impact the economy.

The fact that the dollar is a hard currency also has bearing on the emerging markets. A minor adjustment in US monetary policy can trigger widespread flight of capital from the Indian equity market. In another instance, Indian banks, wary of their heavy dollar exposure and the resulting sanctions risk, refused to process payments for Russian crude. For this reason, the idea of de-dollarisation resonates widely with many in India.

The case for a local or BRICS currency

Two solutions that have often been floated under the aegis of BRICS are replacing the dollar with either local currency trade or a common currency. The idea entails that an alternative currency to settle trade will gradually and eventually lower the demand for dollars, thereby easing the pressure on the reserves the central banks must maintain and even spend to defend local currencies. It is also projected as a proof of concept that can be materialised in times of crisis.

However, pursuing either of the two alternatives runs the risk of becoming a proxy for trade in renminbi.

Local currency trade works best in case of a balanced trade. The case of rupee-ruble trade is instructive. Because of a huge trade surplus vis-à-vis India, Russian banks accumulated rupee balances in special vostro accounts that Moscow could not spend or convert. Eventually, the two had to consider renminbi and dirham as third currencies to settle bilateral trade. Recently, reports suggested that a functioning rupee-ruble mechanism has been established, but did not clarify how associated issues were resolved.

Similarly, Russia-China local currency trade also serves as a warning. As their share of bilateral trade in local currencies expanded to almost 99 per cent, Russia has emerged as the largest holder of renminbi reserves.

Within BRICS, China runs surpluses with most members, while India runs deficits with seven except for Egypt, Ethiopia, and Iran. India’s cumulative trade deficit with BRICS countries in FY26 stood at US$ 226 billion. In practice, local currency settlement across BRICS would therefore mean most members paying or owing China in renminbi.

Alternatively, if one attempts to overcome this shortcoming using a BRICS currency, there are two ways to do it. Either the grouping adopts a common circulating currency with a supranational banking authority to issue it, or it adopts a currency basket for invoicing, on the lines of the IMF’s SDR, where each participating currency is allotted a weightage.

The first pathway would require BRICS members to emulate the Eurozone and permanently surrender their monetary policy sovereignty to a BRICS Central Bank. Neither India nor China would agree to this proposition.

Adopting a weighted basket mechanism — a composite unit weighted by each member’s currency share — also encounters several roadblocks. First, no BRICS member has safe, liquid assets deep enough to back the basket except for maybe China. But its strict capital controls limit its convertibility and liquidity. Second, in the absence of an issuer of last resort, the risk sits entirely with the bearer of the instrument, which discourages anyone from holding it as a reserve. But even if these structural issues are somehow bypassed, a bigger challenge awaits in the form of weightage distribution.

No matter how one allots weightage to participating currencies, whether based on a member’s GDP, trade share, or reserves, Beijing’s renminbi secures the biggest share. BRICS members will end up holding renminbi in their reserves. In effect, any effort to build a currency alternative to the existing system would result in internationalisation of the renminbi through the backdoor.

CBDC will not do the trick

According to reports, India is pushing Central Bank Digital Currency (CBDC) as one of the agenda items at the summit. New Delhi is positioning it as a drive to cut transaction costs in payment settlements. The mechanism entails settling trade and transactions in the digital currency of the trading countries between their respective central banks. In contrast, an ordinary cross-border transaction entails two layers between the correspondent banks: messaging and final settlement, routed through several intermediaries. While the messaging happens instantly, mostly through SWIFT, final settlement between the transacting banks happens much later. The CBDC bridge collapses the two layers into one and removes the need for an intermediary. The message entailing the payment instruction and the settlement are processed simultaneously and instantly between the two central banks, thereby cutting transaction costs and reliance on foreign infrastructure.

However, at the end of the day, trade through CBDC is the digital equivalent of physical local-currency trade. Replacing the rupee with e-rupee and similarly other currencies with their digital equivalents will still not solve the complexities arising out of local-currency trade. Countries with a trade surplus with India will be uninterested in holding e-rupee and instead demand settlement in other currencies, preferably renminbi. Any attempt by member countries to convert accumulated local currencies back into dollars brings back the intermediaries that the CBDC is designed to remove.

The writer is a research analyst with Takshashila’s Indo-Pacific Studies Programme