Answer

De-dollarisation, the gradual shift away from dependence on the US dollar in global trade, is increasingly seen as a strategy to mitigate economic risks rather than directly challenge dollar dominance. Recent initiatives, such as the 2023 Johannesburg BRICS discussions on a shared currency and enhancing trade in local currencies, alongside the 2024 Kazan summits, highlight growing efforts to diversify global trade mechanisms and reduce vulnerabilities.

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De-dollarisation as De-risking 

• Facilitating Trade with Dollar-Deficient Partners: India’s trade policies prioritize enabling transactions with nations lacking dollar reserves by using local currency trade mechanisms.
  For example: The RBI allowed rupee invoicing for trade with Russia after Western sanctions limited dollar availability, ensuring uninterrupted commerce.
• Mitigating Currency Volatility: Global trade denominated in US dollars exposes India to risks from exchange rate fluctuations, particularly during periods of monetary tightening by the Federal Reserve.
• Reducing Exposure to Sanctions: De-dollarisation aims to mitigate risks posed by geopolitical events like sanctions that disrupt access to global financial systems like SWIFT.
  For example: After US sanctions excluded Russia from SWIFT, India facilitated trade via Vostro accounts and alternative currencies, reducing sanction-related vulnerabilities.
• Strengthening Financial Stability: Using local currencies in BRICS trade reduces reliance on dollar fluctuations, enhancing monetary and financial stability for all member nations.
  For example: The Kazan BRICS summit highlighted India’s support for local currency trade agreements to manage exchange rate risks effectively.
• Avoiding Over-dependence on a Single Currency: Diversifying trade settlements across currencies reduces India’s over-dependence on the dollar, ensuring flexibility during global economic uncertainties.
  For example: RBI’s gold purchases and relocation of gold reserves underscore efforts to de-risk the economy from over-reliance on dollar-based reserves.
• Enhancing Regional Cooperation: India’s trade policies within BRICS focus on promoting regional financial integration rather than direct confrontation with the dollar-dominated system.
  For example: The India-Russia trade agreement emphasizes settling transactions in local currencies to bolster economic ties without targeting the dollar explicitly.

De-dollarisation as Challenging the US Dollar: India’s Trade Policies and BRICS Participation

• Countering Dollar Weaponization: India’s push for local currency mechanisms reflects a response to the US’s use of financial systems like SWIFT as tools for political leverage.
  For example: External Affairs Minister criticized the US’s sanction-driven policies that forced India to adopt alternative trade settlement routes.
• BRICS Advocacy for Alternative Currency: India’s participation in BRICS initiatives to discuss a shared currency challenges the dollar’s dominance, fostering multipolarity in global trade.
  For example: The 2023 Johannesburg BRICS summit supported creating a new currency to enhance collective resilience against dollar hegemony.
• Reducing China’s Dominance through Currency Alternatives: India’s cautious stance towards de-dollarisation indirectly challenges the dollar while ensuring BRICS frameworks do not overly favor China.
  For example: India resisted using the Chinese yuan for Russian oil imports, underscoring concerns about power imbalances within BRICS.
• Supporting Multipolar Financial Systems: Diversifying trade currencies aligns with India’s broader geopolitical strategy of promoting a multipolar global financial order.
• Positioning Rupee as an International Currency: India’s steps to internationalize the rupee challenge the dollar’s monopoly while promoting its own currency in global trade.
  For example: RBI’s rupee invoicing policy in 2022 aimed to expand the rupee’s role in international trade, enhancing its global significance.

Challenges India may Face in De-dollarisation

• Global Dominance of the US Dollar: The US dollar remains the most widely used currency in global trade, financial systems, and reserves, making it difficult to replace as the dominant global currency.
  For example: Despite efforts to reduce dependence, over 60% of global reserves are still held in US dollars, complicating efforts for alternatives.
• Limited International Acceptance of the Indian Rupee: The Indian Rupee is not fully convertible on the capital account, which restricts its acceptability for international trade settlements.
• Commodity Pricing in Dollars: Key commodities like crude oil, natural gas, and metals are globally traded in US dollars. India, as a major importer of crude oil, faces challenges in moving away from dollar-denominated transactions.
• Resistance from Key Trading Partners: Many of India’s key trading partners, including the US and the EU, are heavily reliant on the dollar for transactions, which may lead to resistance to the adoption of alternative currencies.
  For example: Trade with the US, which is India’s largest trade partner, is predominantly dollar-based, and any shift could disrupt existing agreements and economic ties.
• Trade Deficits with Major Partners: India has significant trade deficits with many countries, including China and the US. This makes it difficult to convince trade partners to accept rupee payments instead of dollars.
  For example: India imports over $100 billion worth of goods from China annually, with limited exports to offset these payments, leading to continued reliance on dollar transactions.
• Geopolitical Implications:  India’s attempts at de-dollarisation may face resistance from the US, given the geopolitical influence of the dollar in global trade.
  For example: India’s growing trade with Russia in rubles and rupees has already drawn scrutiny from Western nations amidst sanctions on Russia.

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Way Ahead

• Strengthen Local Currency Frameworks: India should work with BRICS to establish robust local currency trade mechanisms that ensure fairness and limit dominance by any single nation, including China.
  For example: Developing transparent guidelines for currency usage and equitable trade settlement ratios can create balanced partnerships within BRICS.
• Engage Diplomatically with the US: India should emphasize that de-dollarisation efforts are aimed at de-risking trade rather than targeting the US dollar, ensuring cooperative trade relations.
  For example: Diplomatic dialogues like EAM’s engagements at Think Tanks can highlight India’s intent to promote financial multipolarity, not confrontation.
• Leverage Technology for Secure Transactions: Strengthening digital payment systems and blockchain-based solutions for cross-border trade can ensure secure and efficient local currency transactions.
  For example: Collaborating with BRICS to establish a blockchain-based settlement system could enhance trust and transparency in trade.
• Diversify Foreign Reserves: India should continue to diversify its reserves by investing in gold and other assets, reducing vulnerability to currency fluctuations or sanctions.
  For example: RBI’s recent gold purchases demonstrate a strategy to hedge against global economic uncertainties and over-reliance on the dollar.
• Promote Rupee Internationalisation: India should gradually promote the rupee for global trade by partnering with more countries and ensuring macroeconomic stability to enhance trust in its currency.
  For example: Expanding bilateral trade agreements like the one with Russia to other nations will help strengthen the rupee’s global acceptance.
• Enhance BRICS Collaboration: India should advocate for BRICS policies that promote trade diversification without aggressive anti-dollar narratives, maintaining balance in global financial diplomacy.
  For example: Positioning BRICS as a complementary, not adversarial, economic bloc to the dollar-led system will foster global trust and stability.

De-dollarisation offers India an opportunity to diversify trade mechanisms, reduce reliance on volatile global currencies, and strengthen regional alliances like BRICS. By promoting the Rupee’s internationalisation, fostering bilateral trade agreements, and enhancing financial resilience, India can align its trade policies with global shifts, ensuring a balanced, robust, and future-ready economic framework.

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