What’s the news?

• Countries worldwide are pursuing de-dollarisation to reduce reliance on the US dollar in international trade, exploring bilateral currency agreements and strategies like rupeefication.

Central idea

• In the past century, a single currency has dominated the global economy, transitioning from the pound sterling to the US dollar, now comprising 59.02% of COFER. The US dollar’s prevalence is due to its pivotal role in international trade. India’s push for the Indian Rupee’s use in trade showcases this trend, aiming at bolstering economic autonomy.

What is meant by Dollarisation?

• US dollar as a substitute for domestic currency: Dollarisation refers to the phenomenon where countries adopt the US dollar as a substitute for their domestic currency to varying degrees.
• This practice can take several forms:

• Financial dollarisation (substituting domestic assets/liabilities with foreign ones)
• Real dollarisation (pegging domestic transactions to exchange rates)
• Transactional dollarisation (using the US dollar for domestic transactions)

• Poor performance of the domestic currency:

• Dollarisation typically arises due to the poor performance of the domestic currency, caused by factors such as political instability or economic uncertainty.
• It can also result from financial market liberalization and economic integration, leading to reduced exchange rate risk and increased capital inflow.

• The US dollar’s dominance: The US dollar’s dominance as an anchor currency for international trade contributes to its widespread acceptance and high demand, thereby driving dollarisation trends.

What is meant by De-dollarisation?

• De-Dollarisation refers to the global trend of countries reducing their reliance on the US dollar in international trade and financial transactions.
• This movement involves shifting towards bilateral currency agreements, using domestic currencies for trade, and promoting alternatives to the dollar.
• The aim is to achieve greater economic autonomy, reduce risks associated with dollar fluctuations, and challenge the dominance of the US dollar in the global financial system.

What is meant by Rupeefication?

• Rupeefication refers to the process of internationalizing the Indian Rupee (INR) by promoting its use in international trade and financial transactions.
• This strategy involves enabling trade partners to transact in INR, issuing financial instruments denominated in INR to foreign entities, and facilitating greater access to the INR in global markets.
• The objective of rupeefication is to enhance the INR’s status as a global currency, reduce dependence on the US dollar, and strengthen India’s economic resilience and autonomy on the global stage.

De-dollarisation in motion

• Brazil’s Bilateral Currency Trade: Brazil is expanding bilateral currency trade agreements, notably with Japan and China. These agreements involve using domestic currencies for trade, reducing reliance on the US dollar.
• China’s Leadership in De-Dollarisation: Following sanctions against Russia, China has been at the forefront of reducing dollar reliance. China’s actions have prompted other BRICS nations to follow suit in decreasing dollar usage.
• Indonesia’s Local Currency Trade System: Indonesia has adopted a Local Currency Trade (LCT) system to lower the role of the US dollar in its current account transactions. This shift aims to promote greater usage of domestic currency.
• Africa’s Consideration for Intra-Africa Trade: African nations are contemplating replacing the US dollar with domestic currencies for intra-Africa trade. This approach aligns with the broader global trend of de-dollarisation.
• BRICS Summit and Integrated Payment System: The upcoming BRICS Summit will address the challenges of de-dollarising trade and establishing an integrated payment system. This reflects the growing global emphasis on reducing dollar dependence.
• India’s Multi-Faceted Approach: India, while pursuing de-dollarisation, also considers bilateral currency agreements. However, it might opt out of a common BRICS currency due to existing trade commitments with the US and Europe

How is India actively advancing its systems to bypass the US dollar and fortify the INR?

• Bilateral Currency Agreements: India is engaging in bilateral currency agreements with multiple nations. These agreements encourage trade partners to transact in INR instead of the US dollar, reducing the reliance on the dollar in international trade transactions.
• Special Rupee Vostro Accounts (SRVAs): India has established Special Rupee Vostro Accounts with various countries, including the UK, Russia, Sri Lanka, and Germany. These accounts enable foreign entities to transact in INR directly with Indian banks, promoting the use of the Indian currency.
• Currency Internationalization: By promoting the use of INR in international transactions, India aims to increase the acceptance of its currency in global markets. This strategy involves initiatives to make INR more widely recognized and used beyond its borders.
• Reducing Dollar Dependency: India’s efforts to develop systems that bypass the dollar aim to reduce the country’s dependence on the US dollar for international trade and financial transactions. This can enhance India’s economic autonomy and mitigate the risks associated with fluctuations in the value of the dollar.
• Enhancing the INR’s Global Role: Strengthening the INR involves making it a viable alternative to the US dollar in global transactions. By creating systems that support the use of INR in trade and finance, India aims to increase the currency’s global significance.

Advantages of rupeefication

• Risk Mitigation for Exporters: Rupeefication provides exporters with a means to limit their exposure to exchange rate risks. By invoicing trade in INR, exporters can avoid the uncertainties associated with fluctuating US dollar exchange rates, enhancing predictability in their earnings.
• Deepened Markets and Wider Access: The adoption of rupeefication can lead to increased market access and deeper trade relationships. As the INR gains wider acceptance, exporters can tap into new markets and expand their customer base.
• Lower Borrowing Costs for the Private Sector: Rupeefication enables the private sector to access international financial markets with reduced borrowing costs. This can result in enhanced profitability and investment opportunities for businesses.
• Public Sector Financing Flexibility: The public sector benefits from the ability to issue international debt denominated in INR. This provides an alternative source of financing for government projects without depleting official US dollar reserves.
• Strengthened Economic Autonomy: By promoting rupeefication, India can gradually reduce its reliance on the US dollar, leading to increased economic autonomy. This reduces vulnerability to external economic shocks and fluctuations in the value of the dollar.
• Microeconomic Growth and Livelihoods: A focus on rupeefication encourages the growth of the private sector, leading to increased economic activities and job opportunities. This approach can contribute to the improvement of livelihoods across various sectors.
• Enhanced Monetary Policy Autonomy: As rupeefication gains traction, India can exercise more control over its domestic monetary policy. This autonomy allows for tailored economic measures that align with the country’s specific needs.

Potential challenges associated with its implementation

• Exchange Rate Volatility: Shifting towards rupeefication could expose businesses to exchange rate volatility if the INR’s value fluctuates significantly against other major currencies. This could impact the predictability of earnings and increase risks for exporters.
• Limited Acceptance in International Markets: Achieving widespread acceptance of the INR in global markets might be challenging. Many international transactions are still predominantly conducted in the US dollar, which could hinder the seamless adoption of rupeefication.
• Global Economic and Political Factors: External economic and political events can impact the feasibility of rupeefication. Global factors such as economic crises or geopolitical tensions could influence the willingness of other nations to engage in transactions using the INR.
• Trade Balance and Reserves: A swift shift to rupeefication might impact India’s trade balance and foreign exchange reserves, potentially necessitating greater reserves of foreign currencies to manage trade deficits.
• Gradual Implementation: Rapidly transitioning to rupeefication might lead to economic disruptions.

Way forward

• Gradual Transition: To address the challenges and uncertainties associated with shifting towards rupeefication, a gradual and phased approach is recommended. This allows businesses, financial institutions, and the economy as a whole to adapt to the changes smoothly.
• Macroeconomic Stability: Maintaining macroeconomic stability is crucial. Efforts should be directed toward ensuring the stability of the INR’s value to inspire confidence among trade partners and investors.
• Promoting INR Use: Initiatives to promote the use of the INR in international transactions should be continued. This could involve diplomatic efforts to foster bilateral agreements, increasing awareness about the benefits of INR invoicing, and addressing concerns about exchange rate risk.
• Collaborative Approach: Collaborating with other nations and international organizations is essential. The adoption of rupeefication requires cooperation and coordination among various stakeholders to establish the INR as a viable global currency.
• Balancing Trade and Reserves: Balancing trade and managing foreign exchange reserves remain crucial. Gradual rupeefication should align with maintaining a stable trade balance and adequate reserves to manage potential deficits.

Conclusion

• While the journey towards de-dollarisation and rupeefication is multifaceted and not devoid of challenges, India’s persistent efforts to limit dollar reliance while nurturing the international status of the INR underscore its commitment to greater economic autonomy. By gradually integrating the INR into the global financial landscape, India aims to bolster its economic resilience, promote growth, and enhance its position as a global economic player.

Also read:

The Future of the US Dollar As a World Reserve Currency

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