Economy
De-Dollarization and India
- 20 Mar 2025
- 11 min read
For Prelims: BRICS+, De-dollarisation, Central Bank Digital Currencies (CBDCs), Bank for International Settlements (BIS), 16th Kazan BRICS summit 2024, Cryptocurrencies, Exchange Rate, Currency Devaluation, Blockchain Payment, UPI, RuPay, IMF, SDRs, Sovereign Wealth Funds, G20.
For Mains: De-dollarisation and its impacts on Indian and global economy.
Why in News?
Recent financial and currency initiatives, particularly within the BRICS+ framework, seek to lessen dependence on the US dollar-dominated system (de-dollarisation) and establish alternative mechanisms for global trade and finance.
De-dollarization
- It refers to the process of reducing the dominance of the US dollar in global trade, finance, and foreign exchange reserves.
- It involves substituting the US dollar with other currencies or assets (such as gold, cryptocurrencies, or regional currencies) for international transactions, commodity trading (like oil), and reserve holdings.
What are the Recent Financial and Currency Initiatives for De-dollarisation?
- mBridge Project: It is a digital cross-border payment system using Central Bank Digital Currencies (CBDCs). It was initially promoted by the central banks of several countries like China, Thailand, with support from the Bank for International Settlements (BIS).
- Speculation suggests the BIS withdrew under US pressure to protect dollar dominance.
- BRICS+ Initiatives: BRICS Bridge and BRICS Clear are proposed financial systems for setting up a payment and clearing system among Brics+ countries.
- BRICS+ group includes original BRICS nations i.e., Brazil, Russia, India, China, and South Africa along with new members i.e., Egypt, Ethiopia, Iran, United Arab Emirates, and Indonesia.
- Petro-Yuan Market: Shanghai International Energy Exchange (2018) handles 10.5% of global oil trade and 14.4% of global oil futures.
- Saudi Arabia and the UAE's non-dollar oil trades boost the petro-yuan by increasing demand and enhancing its credibility as a stable alternative to the US dollar.
- BRICS Currency: At the 16th Kazan BRICS summit 2024, an agreement in principle was reached to use a new settlement currency called the "Unit," backed by 40% gold and 60% local currencies of member countries.
What are Global Benefits of De-Dollarization?
- Reduced Geopolitical Risks: Countries can insulate themselves from US sanctions and foreign policy decisions that leverage the dollar's dominance (e.g., freezing assets or restricting access to the global financial system).
- E.g., After Russia's 2022 invasion of Ukraine, the West froze over USD 300 billion in Russian assets.
- Diversification: De-dollarization promotes multi-currency use, reducing reliance on one currency and balancing global finance.
- E.g., rise of the petro-yuan and Indian rupee to create an alternative payment system.
- Strengthening Regional Currencies: Countries can boost their currencies in trade, strengthening economic sovereignty and reducing exchange rate risks.
- E.g., India trading oil with the UAE in rupees.
- Reduced Vulnerability: Countries become less impacted by US monetary policy (e.g., interest rate changes), avoiding effects like capital flight and currency devaluation.
- Increased Use of Gold: De-dollarization has led to a resurgence in gold as a reserve asset, providing a stable alternative to fiat currencies.
- Promotion of Digital Currencies: De-dollarization speeds up digital currency and blockchain payment development, driving financial innovation.
- E.g., China's digital yuan (e-CNY) and India’s Digital Rupee (e₹).
What Concerns are Associated with Global De-dollarization?
- Short-Term Instability: Sudden shifts in currency reserves or trade agreements could create volatility in global markets, as the dollar remains the backbone of international trade and finance.
- Limited Acceptance of Alternatives: Many alternative currencies (e.g., the yuan, rupee, or ruble) lack the liquidity, stability, and global trust that the US dollar enjoys.
- Risk of Fragmentation: De-dollarization could lead to the formation of competing currency blocs, fragmenting the global economy and complicating international trade and investment.
- Geopolitical Tensions: The US may respond aggressively to de-dollarization efforts, potentially escalating trade wars, sanctions, or other forms of economic retaliation.
- E.fg., US tariffs threats to BRICS countries attempting to reduce dollar dependency.
- Global Repercussions: A decline in the dollar's reserve status could lead to reduced demand for US debt, and economic instability in the US, which could have global repercussions, as the US being the largest economy.
- Exchange Rate Determination Problem: Without the US Dollar as a global benchmark, countries must use alternatives like a multi-currency basket, complicating exchange rates.
- E.g., India and Russia are still negotiating a currency exchange rate based on their local currencies.
What is India’s Stand on De-Dollarization and it Impacts India?
- India’s Stand on De-Dollarization: India engages in BRICS+ currency discussions but remains cautious, affirming it has no intent to undermine the US dollar, seeing it as key to global stability.
Benefits
- Promotion of the Indian Rupee: It encourages the use of the Indian rupee in bilateral and multilateral trade agreements. E.g., India’s trade with Russia in rupees for oil imports.
- Greater Monetary Policy Autonomy: Reducing dollar reliance gives India greater control over monetary policy to manage inflation, and interest rates, without being impacted by US policy shifts.
- Diversification of Reserves: De-dollarization helps India diversify reserves into other currencies (e.g., euro, yen, yuan) or gold, reducing dollar devaluation risks.
- Reduced Exposure to US Sanctions: It reduces India’s vulnerability to US-led sanctions providing greater geopolitical flexibility.
- It reduces reliance on the US-centric SWIFT system, shielding India’s financial system from risks and sanctions.
Concerns
- Impact on Foreign Investment: Moving away from the dollar could deter foreign investors who prefer the stability and predictability of dollar-denominated assets.
- Challenges in Diversifying Reserves: Alternative currencies or assets like gold may expose India to new risks, such as currency depreciation or price fluctuations in commodities.
- India risks over-reliance on the Chinese yuan, bringing geopolitical and economic challenges.
- Impact on Remittances: De-dollarization may disrupt India's dollar-denominated remittances, impacting millions of families.
What Lies Ahead for India?
- Strengthening Rupee: Expand bilateral trade in rupees, such as India-UAE oil trade, while promoting currency swaps and regional frameworks like BRICS+ initiatives.
- Diversifying Reserves: Reduce USD reliance by diversifying reserves into Euro, Yen, Yuan, gold, and IMF SDRs while developing sovereign wealth funds and commodity reserves for stability.
- Managing Risks: Maintain a multi-currency trade system, strengthen ties with ASEAN, EU, and Africa for diversified trade, and ensure investor confidence in Rupee.
- Strengthening India’s Financial Position: Position Mumbai as a global financial hub, boost bond market liquidity, and advocate for a multi-currency system through IMF, G20, and other bodies.
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Drishti Mains Question: Discuss the concept of de-dollarization and its implications for India’s economy. |
UPSC Civil Services Examination Previous Year Question (PYQ)
Prelims
Q. Consider the following statements: (2019)
- Most of India’s external debt is owed by governmental entities.
- All of India’s external debt is denominated in US dollars.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Ans: (d)
Q. Recently, which one of the following currencies has been proposed to be added to the basket of IMF’s SDR? (2016)
(a) Rouble
(b) Indian Rupee
(c) Rand
(d) Renminbi
Ans: (d)
Mains
Q. How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India? (2018)
Q. Craze for gold in Indians has led to surge in import of gold in recent years and put pressure on balance of payments and external value of rupee. In view of this, examine the merits of Gold Monetization scheme. (2015)
