Mains Practice Questions

Approach:

• Introduce the answer by briefing about De-dollarisation
• Give the Drivers of De-dollarisation
• Highlight the Opportunities for India in De-dollarisation
• Delve into the Challenges for India in De-dollarisation’
• Suggest Steps Forward for India
• Conclude in a balanced manner.

Introduction:

De-dollarisation refers to the process of reducing global reliance on the US dollar for international trade and financial transactions.

• The US dollar accounts for 59% of global reserves and dominates international trade and commodities like oil, discussions on de-dollarisation have gained momentum, especially among BRICS nations including India.

Body:

Drivers of De-dollarisation:

• Geopolitical Sanctions and Economic Coercion: The US has used the dollar as a tool for imposing sanctions (e.g., on Russia and Iran), restricting access to global financial systems like SWIFT.
• Shift Towards Multipolarity: The emergence of regional powers like China, Russia, and India is driving efforts to reduce dependence on the dollar and establish a more balanced global economic system.
• Diversification of Foreign Reserves: Central banks worldwide are reducing dollar holdings in favor of gold and other currencies, such as the Chinese yuan, to hedge against economic risks.
• Digital and Regional Currency Innovation: The rise of Central Bank Digital Currencies (CBDCs) offers an opportunity for countries to conduct international trade without relying on the dollar.

Opportunities for India in De-dollarisation:

• Enhanced Sovereignty in Trade: Promoting rupee invoicing can shield India from dollar-induced vulnerabilities, such as exchange rate volatility and geopolitical risks like sanctions.
  • Initiatives like the RBI’s 2022 decision to allow rupee-based trade settlements underscore this effort.
• Strengthening the Rupee: Reducing dollar dependence could elevate the rupee's role as a global trade currency, aiding its internationalisation.
  • Greater acceptance of the rupee can boost investor confidence and reduce India’s reliance on foreign exchange reserves.
• Cost Savings and Economic Stability: By trading in domestic currencies, India can lower transaction costs and mitigate risks associated with dollar price fluctuations in commodities like oil.
• Strategic Alliances: Collaborating with BRICS nations and other global players to develop alternative trade mechanisms could enhance India’s global influence in shaping a multipolar economic order.

Challenges for India in De-dollarisation:

• Global Dollar Dominance: The dollar remains the preferred global reserve and transaction currency due to its liquidity, stability, and widespread acceptance.
  • Shifting from the dollar risks alienating allies and impacting dollar-dominated trade, especially in commodities like oil and gold.
• Geopolitical Pressures: US sanctions and tariffs could target nations seeking alternatives, as highlighted by former President Trump’s threats against BRICS countries.
  • Aligning with non-dollar trade blocs like BRICS risks India’s strategic ties with the US and other Western economies.
• Inadequate Infrastructure for Rupee Internationalisation: Despite RBI efforts, the rupee lacks the global acceptance and trust enjoyed by the dollar.
  • Limited financial instruments and lack of global rupee-denominated trade hubs hinder its adoption.
• Rise of the Chinese Yuan: India’s reluctance to use the yuan, despite its increasing role in global trade, highlights geopolitical tensions with China.
• Economic Stability Concerns: Rapid shifts away from the dollar could destabilise markets, disrupt trade, and impact India’s foreign exchange reserves and debt obligations.

Steps Forward for India

• Promote Rupee Trade Agreements: Bilateral agreements with trading partners, especially in South Asia, Africa, and the Gulf, to expand rupee invoicing.
• Strengthen Domestic Currency Infrastructure: Develop rupee-based financial instruments and global trade hubs to enhance rupee liquidity.
  • Improve regulatory frameworks to support seamless international rupee transactions.
• Diversify Foreign Reserves: Increase gold reserves and invest in a broader basket of currencies to reduce dollar exposure.
• Engage in Multilateral Collaboration: Work within BRICS to shape alternatives like a common currency while safeguarding India’s interests.
  • Balance participation in non-dollar trade blocs with maintaining strategic ties with dollar-aligned economies.
• Gradual Transition Strategy: Pursue a phased approach to de-dollarisation, ensuring minimal disruption to trade and economic stability.
  • Promote digital currency initiatives, such as a central bank digital currency (CBDC), to complement de-dollarisation efforts.

Conclusion:

De-dollarisation offers India a pathway to enhance trade sovereignty, reduce vulnerability to geopolitical risks, and strengthen the rupee's global standing. By fostering multilateral cooperation, strengthening domestic currency infrastructure, and pursuing gradual transitions, India can seize the opportunities of de-dollarisation while mitigating its risks.