De-Dollarisation

General Studies Paper 3

Context: Recently, India and Malaysia have agreed to settle trade in the Indian rupees.

About:

• De-dollarisation is a process of substituting the US dollars with another agreed currency to carry out international trade transactions. It is a method of reducing the dollar’s dominance of global markets.
• It is a way to reduce the effects of weaponization of the US dollar.

Advantages 

• Reducing Dependence on the US Dollar:By using other currencies or a basket of currencies, countries can reduce their dependence on the US dollar and the US economy, which can help to mitigate the impact of economic and political changes in the US on their own economies.
• Improving Economic Stability:By diversifying their reserves, countries can reduce their exposure to currency fluctuations and interest rate changes, which can help to improve economic stability and reduce the risk of financial crises.
• Increasing Trade and Investment:By using other currencies, countries can increase trade and investment with other countries that may not have a strong relationship with the US, which can open up new markets and opportunities for growth.
  • Direct Trade in country’s national currency leads to saving on currency conversion spreads,
• Reducing US monetary Policy Influence:By reducing the use of the US dollar, countries can reduce the influence of US monetary policy on their own economies.

Challenges

• Not Fully Convertible: The challenge for national currencies is that these are not fully convertible. Thus, despite the rise of alternate systems of trade, and multiple currency circulation systems, the dollar still dominates.
• Currency Fluctuations: National currencies can fluctuate in value relative to the dollar, which can make it difficult for countries to plan their economic policies and for businesses to make long-term investments.
• Limited Use of National Currencies in International Trade:The dollar is widely used in international trade, making it difficult for national currencies to compete. This can make it harder for countries to conduct trade with one another and for businesses to expand internationally.
• Dependence on the Dollar: Many countries are heavily dependent on the dollar for trade and financial transactions, which can make them vulnerable to changes in the value of the dollar and to the policies of the US government.
• Financial Instability: The dollar’s dominance in the international financial system can contribute to financial instability in other countries, as they may be more susceptible to financial crises.
• Monetary Sovereignty: The hegemonic role of the dollar limits the monetary sovereignty of other countries by making it difficult for them to use monetary policy to stabilise their economies.

 Initiatives:

• The Reserve Bank of India (RBI) unveiled a rupee settlement system for international trade as a step towards internationalising the rupee.
• Banks from eighteen countries were allowed by the Reserve Bank of India (RBI) to open Special Rupee Vostro Accounts (SRVAs) to settle payments in Indian rupees.
• India and Russia are considering the use of a third currency or inclusion of a third country like UAE to facilitate oil trade between the two countries.

Way Forward:

• India can further look forward to inclusion of BRICS countries or use of a common digital currency to protect the countries trade from Dollar risks.