India backs CBDC links for BRICS payments

India is set to urge BRICS members to expand the use of central bank digital currencies (CBDCs) for international transactions while steering clear of backing a unified BRICS payments network that could be viewed as a dollar substitute. The proposal is slated to be discussed at the upcoming BRICS leaders' summit in New Delhi on September 12 and 13, where India, currently serving as the chair, aims to reach a consensus on reducing costs and expediting trade, tourism, and remittance payments among member states.

The Reserve Bank of India (RBI) Governor, Sanjay Malhotra, recently stated that BRICS countries are exploring connections between their high-speed payment systems and CBDCs, with a dedicated task force weighing various options. Malhotra emphasized that these discussions are still in an exploratory phase and that no definitive model has been finalized.

India favors interoperable national systems over a uniform currency or a centrally managed BRICS payments framework. The emphasis is placed on efficiency, reduced transaction costs, and the utilization of sovereign currencies, distinguishing this approach from proposals that could be perceived as a coordinated effort to undermine the dollar.

This stance has gained political significance as BRICS nations deliberate the extent to which financial collaboration should transcend traditional boundaries. While Russia and certain other members have advocated for more robust alternatives to Western-dominated payment channels, India has consistently ruled out endorsing a common BRICS currency and has resisted positioning financial initiatives as a de-dollarization strategy.

The RBI had previously suggested incorporating the discussion on linking BRICS digital currencies into the summit agenda. Such an arrangement could enable transactions to be settled directly through participating central banks or financial institutions, diminishing reliance on multiple correspondent banks and potentially lowering foreign-exchange and processing expenses.

Central bank digital currencies are electronic representations of national currencies issued by monetary authorities, with their value and settlement backed by central banks. India has been piloting the digital rupee since 2022 and has incorporated enhancements such as programmability and offline functionality as the RBI evaluates how it can augment payment methods.

Malhotra has highlighted the potential for lower costs in cross-border payments, particularly in retail transactions. He has also expressed the RBI's commitment to promoting wider international acceptance of the rupee and encouraging settlement in local currencies when commercially advantageous. India is pursuing payment connectivity through the Unified Payments Interface (UPI), its instant retail payments platform, which Prime Minister Narendra Modi recently advocated for extending to more countries.

UPI is already operational or linked with services in several foreign markets, including Singapore and the United Arab Emirates. However, the BRICS deliberations extend beyond retail payment links. Officials are also investigating whether CBDCs issued by central banks could serve as a secure settlement layer for transactions between member economies without necessitating the creation of a shared currency or a new supranational monetary authority.

Technical and policy challenges persist. CBDC systems in BRICS countries are at varying stages of development, and any cross-border arrangement would necessitate agreement on interoperability, cybersecurity, data standards, foreign-exchange conversion, liquidity management, governance, and legal liability in the event of transaction failures or disputes.

Trade imbalances pose an additional complication, as a country receiving more of another member's currency than it can utilize may be hesitant to accumulate excess balances. Policymakers have therefore also examined mechanisms involving currency swaps and alternative settlement arrangements to address disparities in bilateral trade.

The BRICS group now comprises 11 members, making consensus formation more challenging compared to its original configuration of Brazil, Russia, India, China, and South Africa. The expanded roster includes Egypt, Ethiopia, Iran, the United Arab Emirates, and Indonesia, while Saudi Arabia has participated in BRICS meetings while its membership status remains subject to clarification.