Reserve Bank Governor Shaktikanta Das addressed concerns about “de-dollarisation” stating that India has no plans to “de-dollarise” its trade.

Key Highlights of the RBI Governor Address

• India’s Stance on De-dollarisation: The focus is on derisking trade rather than moving away from the US dollar.
  • Steps like permitting vostro accounts and agreements for trade settlement in local currencies aim to reduce risks from currency fluctuations.
• BRICS Currency Discussions : A common BRICS currency has been discussed but remains at an early stage without significant progress.
  • RBI Governor noted that geographical contiguity, as in the EU, is a factor aiding the success of a single currency, which is absent in BRICS.
• Dependence on the US Dollar: While the US dollar remains dominant, reliance on a single currency poses risks due to potential appreciation or depreciation.

Enroll now for UPSC Online Course

About De-dollarisation

• Definition: De-dollarisation refers to efforts by countries to replace the U.S. dollar with other currencies as the global reserve currency.
• Reason: Countries aim to reduce dependence on the dollar to mitigate risks related to U.S. economic policies and sanctions, which can significantly impact global trade and financial stability.
  • Attempts to de-dollarise have gained momentum post-Russia’s invasion of Ukraine, with sanctions restricting dollar-based transactions fueling concerns about the weaponization of the currency.

Dollar Dominance and Its Reasons

• Post-World War Era: The U.S. emerged as the dominant economic power, with its GDP constituting nearly 50% of the global economy at one point.
• Bretton Woods Agreement (1944): Delegates from 44 nations agreed to adopt the U.S. dollar as the global reserve currency, pegged to gold at the time.
• Global Trust: The U.S. dollar’s stability, coupled with high trust in American financial markets and governance, makes it a preferred currency for international trade and investment.
• Liquidity: The dollar offers easy access to nominally risk-free U.S. Treasury instruments, which are highly sought after by global investors.

Issues Related to Dollar Dominance

• Economic Power Concentration: The dominance of the dollar gives the U.S. significant control over global financial transactions, enabling it to impose sanctions and influence global trade.
• Trade Deficits: Persistent U.S. trade deficits result in excess dollars circulating globally, often reinvested in U.S. assets, creating imbalances.
• Challenges for Other Currencies: Attempts like India-Russia’s rupee-rouble trade face hurdles due to trade imbalances, leaving one country with surplus currency it cannot easily utilize.

Check Out UPSC CSE Books From PW Store

Global Trend in De-Dollarisation

• Diversification of Currency Reserves: BRICS nations are actively diversifying their foreign exchange reserves to reduce dollar exposure.
• BRICS Currency: At the recent Brics summit in Russia’s Kazan, a symbolic banknote displaying the flags of Brics nations was also introduced, sparking conversations about the future of global finance.
  • However, Russian President Vladimir Putin clarified that the bloc is not currently considering a unified Brics currency or developing an alternative to the SWIFT payment system.
• Central Bank Digital Currencies (CBDCs): Many countries are exploring the development of CBDCs as an alternative to fiat currencies, potentially reducing the need for dollar-denominated transactions.
• Interoperability: Efforts are being made to establish interoperable CBDC systems between different countries, facilitating cross-border payments without relying on the dollar.
• Alternative Payment Systems: Countries are developing alternative payment systems to reduce dependence on SWIFT, the global payment messaging system dominated by Western institutions.
• Domestic Payment Systems: Strengthening domestic payment systems can reduce reliance on foreign currencies for domestic transactions.
• Gold-Backed Currencies: Some countries are considering returning to a gold standard or using gold as a part of their reserve assets.
  • For example, Russia and China have been actively increasing their gold reserves in recent years and have even suggested a potential return to a gold standard.
• Regional Economic Integration: It can foster trade and investment within regions, reducing reliance on the dollar for cross-border transactions.
  • India and Russia have already begun settling some trade in their local currencies, exemplifying steps toward reducing dependence on the US dollar.

India’s Initiatives to Reduce Impact of Dollar Fluctuations

• Local Currency Trade Agreements: India has been increasingly entering into bilateral trade agreements with various countries, allowing for trade settlements in local currencies. This reduces the need for dollar conversion and exposure to exchange rate risks.
  • India-UAE Currency Swap Agreement: This agreement enables direct trade between the two countries in their respective currencies, reducing reliance on the dollar.
  • India-Maldives Currency Swap Agreement: A similar agreement with the Maldives aims to boost trade and investment between the two nations, minimizing dollar exposure.
• Vostro Accounts: Vostro accounts allow foreign banks to hold Indian rupees in Indian banks. This facilitates direct trade settlements between Indian and foreign entities, reducing the need for dollar-denominated transactions.
  • Several countries, including Russia, Singapore, and the UK, have opened vostro accounts in Indian banks to facilitate rupee-denominated trade.
• Focus on Deriskin Rather than outright de-dollarization: India is focusing on a more nuanced approach of derisking. This involves diversifying trade partners, exploring alternative payment systems, and reducing reliance on a single currency.

Enroll now for UPSC Online Classes

Conclusion

The US dollar’s dominance in the global financial system persists, despite its vulnerabilities, due to the lack of a superior alternative. While the US economy may face challenges, its stability, credibility, and attractive investment opportunities maintain its global appeal. The US dollar’s dominance could be challenged if a more compelling alternative emerges, offering similar or superior benefits.

DOWNLOAD PDF