The world is expecting the US Federal Reserve to start tapering its quantitative easing program soon. In anticipation of this, investors have withdrawn funds from many developing economies, leading to depreciations across a range of developing country currencies. India and Indonesia have been the worst affected with their currencies falling more than 15%. The sharp falls have threatened to create wider economic instability and prompted some central banks to raise their benchmark interest rates and intervene directly in foreign exchange markets.
In order to protect their interest, BRICS nations have agreed to set up a US $100 bn foreign currency reserve pool to counter the impact of a pull-out by foreign investors when the US Federal Reserve starts tapering its quantitative easing program. China, holder of the world's largest foreign exchange reserves, will contribute the lion's share of the currency pool. China would contribute US$ 41 bn towards the currency reserve pool. Brazil, India and Russia would contribute US$ 18 bn each to the fund, while South Africa would contribute US$ 5 bn.
However, the proposed currency fund will take some time to take shape. The technical details of the proposed fund still need to be worked out. And thus it is unlikely that the fund will be in place soon enough to temper the effects of an expected pullback of US monetary stimulus.
BRICS have a total of US$ 4.4 trillion in currency reserves and 43% of the global population, but not the appropriate financial influence which is why they need to further work together in order to create the tools necessary to counter those of the developed world. All five countries have felt the negative impacts of the policies pursued by the US Federal Reserve, the Bank of Japan and the European Central Bank.
The creation of the US$ 100 bn fund is another powerful step in the right direction in order to limit the negative impacts on currency pairs due to the decisions made by the US, Japan and the EU. It will allow BRICS to bring more stability to forex markets or at least limit the impact or duration of it.