De-Dollarisation TRUMPED

Amid US warnings, India maintaining safe
reserves in dollar even while inching away

The US dollar’s dominance in international transactions, along with its stability and liquidity, makes a full-scale de-dollarisation difficult. India  has expressed interest in reducing its dependence on the US dollar but the process is gradual and strategic rather than a complete or abrupt shift.

US President-elect Donald Trump has once again reignited the debate and speculation over de-dollarisation of trade. He is reported to have threatened that countries that shift their trade transactions from dollar to other currencies would invite 100 per cent import tariffs.

The push for de-dollarisation has been most vocally supported by Russia, which views it as a means to bypass the Western-dominated global financial system.

India’s export-import trade should not feel unduly unsettled by this development. This is because India prefers to tread cautiously. This country has expressed interest in reducing its dependence on the US dollar but the process is gradual and strategic rather than a complete or abrupt shift. The country is looking to diversify its foreign exchange reserves and explore alternatives to the dollar for international trade and investments, especially in the context of rising geopolitical tensions and economic self-reliance.

India has been actively promoting the use of local currencies in bilateral trade agreements. It has entered into agreements with countries such as Russia, Iran, and some of its neighbours to conduct trade in Indian rupees or their respective local currencies instead of the US dollar.

For instance, in response to US sanctions, India has increased its use of the Indian rupee and Russian ruble for trade, especially in the energy sector. India also made arrangements to settle oil payments to Iran in rupees when sanctions were imposed.

India still holds a significant portion of its foreign exchange reserves in US dollars, but the Reserve Bank of India (RBI) has been gradually diversifying these reserves. The central bank has been accumulating gold and diversifying into other currencies like the euro and the Japanese yen to reduce dependency on the dollar.

India is  a key member of the BRICS grouping which has discussed alternatives to the US dollar in global trade. BRICS nations have explored the idea of creating a new reserve currency backed by a basket of commodities or local currencies, but this remains in the early stages.

India’s concerns about the impact of US sanctions on its global trade and financial transactions have driven its interest in exploring alternatives to the US dollar. In recent years, India has shown a desire to reduce vulnerability to external sanctions by developing a more resilient international payment infrastructure, such as the International Payment System (INR-based transactions) and the Cross-Border Payment System.

Furthermore, there is interest in the development of a central bank digital currency (CBDC) as a way to enhance its monetary sovereignty and further reduce dependence on dollar for cross-border transactions. The digital rupee is being tested by RBI for various use cases, including international trade.

Despite these efforts, the dollar remains deeply entrenched in global trade, finance, and as a reserve currency. The US dollar’s dominance in international transactions, along with its stability and liquidity, makes full-scale de-dollarisation difficult. Many of India’s trade partners also use the US dollar, and global oil and energy markets are predominantly priced in dollars, making an immediate shift away from the dollar challenging.