Emerging Markets

How BRICS bank hurts India's Modi

The significance of a BRICS development bank
The significance of a BRICS development bank

The selection of Shanghai as the headquarters for the BRICS Development Bank could hurt Indian Prime Minister Narendra Modi's domestic ratings, according to one expert.

Modi "has been outmaneuvered," Aditi Phadnis, South Asia advisor at Teneo Intelligence said in a note. "With Shanghai rather than Mumbai as the headquarters for the new BRICS (Brazil, Russia, India, China and South Africa) bank, Modi will have to return home empty-handed."

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At a summit in Brazil this week, BRICS leaders agreed to create a development bank and currency reserve that will be capitalized at $100 billion. The new bank will be modeled after the World Bank and International Monetary Fund (IMF), which emerging economies have long complained were too Western-centric.

Earlier this week, the Indian government expressed hope that the bank would be headquartered in India, which would have boosted Modi's domestic ratings following a lackluster first 45 days as prime minister, experts say.

Securing India as the headquarters for the BRICS development bank would have elevated Modi to the global status to that of a visionary leader, Manjeet Kripalani, executive director of the Indian Council on Global Relations, wrote in an op-ed in the Financial Times on Tuesday.

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Leaders of the BRICS during the 6th summit in Fortaleza, Brazil, on July 15, 2014

The summit was an ideal platform for Modi to boost his country's profile following the lukewarm reception of the administration's first federal budget last week, Teneo Intelligence said.

The budget was seen as India's opportunity to convince the world of its commitment to reducing its massive budget deficit, but a lack of clarity failed to make it the game changer that experts had hoped for.

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The importance of location

The location of the BRICS Development Bank is important because it reflects the host country's relative power, experts say.

The IMF headquarters and World Bank are headquartered in Washington DC, for instance, which reflects the relative power of the United States. In recent years, negotiations about a currency union in the Gulf States have broken down over the issue of whether the new Gulf Cooperation Council (GCC) central bank would be located in Riyadh or the UAE.

Individual weaknesses sparked BRICS bank: UBS
Individual weaknesses sparked BRICS bank: UBS

"China is well aware of these precedents and would insist that the bank be located in Shanghai, the financial center of China, to reflect China's relative contribution to the funding of the bank," James Rickards, senior managing director at Tangent Capital told CNBC.

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Beijing has lobbied heavily for the bank's creation, raising fears that President Xi Jinping is using it to advance the mainland's agenda.

"The fact that the bank will be based in China and mostly capitalized by China gives China more power in choosing which projects get funded and which do not," Rickards added.

Not all is lost

India has been granted presidency of the bank for the first five years, which could partly make up for Modi's defeat, according to Teneo.

"The Modi government has already said it would pitch for an Indian to become the first president of the BRICS bank. This concession could be a second-best stab to make up for lost ground. This might be crucial given that a foreign trophy might help Modi quell a nascent tide of political questions at home," Phadnis concluded.

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Unlike the World Bank and IMF where presidents are usually nominated by Europe or the U.S., the BRICS bank will have a rotating five-year presidency among members.