Q. De-dollarisation is gaining attention in India. Examine its feasibility and potential impact on trade and financial stability. (15 marks 150 Words)
Question
Q. De-dollarisation is gaining attention in India. Examine its feasibility and potential impact on trade and financial stability. (15 marks 150 Words)
Model Answer
Q. De-dollarisation is gaining attention in India. Examine its feasibility and potential impact on trade and financial stability. (15 marks 150 Words)
Paper
GS III
Subject
Indian Economy
Syllabus as Per Notification
Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Topic
De-dollarisation & Its Feasibility for India’s Trade
Approach:
Introduction
Introduce with the meaning of De-dollarisation and Objective of Indian
Body
Feasibility of De-dollarisation
Institutional readiness, Digital-payment & BRICS advantage, Structural constraint, Strategic constraint.
Impact of De-dollarisation on Trade
Lower transaction costs and exchange-rate risk, Greater resilience of trade flows, Expansion of trade and rupee internationalisation.
Impact of De-dollarisation on Financial Stability
Reduced vulnerability to dollar-liquidity shocks, Diversified reserve architecture, Potential capital-flow and exchange-rate volatility
Way Forward
Deepening Rupee Financial Markets, Building Interoperable Multi-Currency Payments, Diversifying with Macroeconomic Safeguards.
Conclusion
Conclude by stating India’s de-dollarisation should be viewed as de-risking rather than dollar displacement.
Context
Members of the Parliamentary Standing Committee on External Affairs, questioned the government on whether it plans to push a de-dollarisation agenda at the 18th BRICS Summit to be held in New Delhi.
Introduction
De-dollarisation refers to reducing excessive reliance on the US dollar in trade settlement, invoicing, reserves and cross-border finance. For India, however, the objective is better understood as de-risking rather than abandoning the dollar. The RBI’s framework for international trade settlement in rupees itself treats INR settlement as an additional arrangement alongside freely convertible currencies.
Body
Feasibility of De-dollarisation
Institutional readiness: SRVA and local-currency settlement
RBI framework for Special Rupee Vostro Accounts (SRVAs) enables India to settle eligible international trade in INR, creating an institutional pathway for De-dollarisation.
RBI introduced framework for invoicing and settlement of international trade in INR in July 2022.
Digital-payment & BRICS advantage: UPI, CBDC
India's UPI and CBDC (e₹) ecosystem, alongside BRICS discussions on payment interoperability and local-currency settlement, can enable faster and more efficient cross-border settlements.
Structural constraint: Dollar and commodity dependence
Complete de-dollarisation remains difficult because the dollar is deeply embedded in Global reserves, trade invoicing, commodity pricing and international financial markets.
As per IMF, Dollar accounted for 57.13% of global foreign-exchange reserves.
Strategic constraint: Avoiding replacement dependence
Reducing dollar dependence could create excessive dependence on another major currency, particularly the Chinese yuan.
Hence, India should pursue multi-currency diversification, rather than replacing dollar dependence with yuan dependence.
Impact of De-dollarisation on Trade
Lower transaction costs and exchange-rate risk
Local-currency settlement can reduce dependence on dollar conversion, thereby lowering transaction costs and currency-conversion risks in bilateral trade.
India local-currency settlement arrangements with the UAE and Indonesia.
Greater resilience of trade flows
Alternative settlement channels can help sustain trade when conventional dollar-based payment mechanisms face geopolitical or financial disruptions.
India's trade with Russia highlighted the need for alternative settlement mechanisms following Western financial restrictions.
Expansion of trade and rupee internationalisation
Wider acceptance of INR can facilitate bilateral trade while creating overseas demand for the rupee and supporting its internationalisation.
RBI 2022 framework permits foreign trading partners to maintain Special Rupee Vostro Accounts, enabling trade settlement in INR.
Impact of De-dollarisation on Financial Stability
Reduced vulnerability to dollar-liquidity shocks
Greater use of local currencies can reduce exposure to dollar shortages, exchange-rate shocks and disruptions in dollar-based payment channels.
Alternative settlement arrangements developed around India's Russia trade.
Diversified reserve architecture
Greater allocation towards Gold and non-dollar reserve currencies can reduce concentration risk in dollar-denominated assets and contribute to a more multipolar reserve system.
IMF COFER data indicate diversification towards currencies such as Australian dollar, Canadian dollar, renminbi and Singapore dollar, alongside continued dollar dominance.
Potential capital-flow and exchange-rate volatility
Greater internationalisation of the rupee could increase the scale and speed of cross-border capital flows, potentially amplifying exchange-rate and asset-price volatility.
Rupee internationalisation needs to be accompanied by deeper financial markets, effective hedging instruments and sound macroeconomic fundamentals.
Way Forward
Deepening Rupee Financial Markets
Strengthening bond, derivatives and hedging markets before expanding rupee internationalisation, as emphasised by the IMF and BIS.
Building Interoperable Multi-Currency Payments
Expanding SRVAs, local-currency settlements, currency swaps and UPI/CBDC linkages, on the lines of BIS Project Nexus and Project mBridge (multi-Central bank digital currency platform).
Diversifying with Macroeconomic Safeguards
Combining rupee internationalisation with export competitiveness, policy credibility, diversified reserves and adequate dollar liquidity, consistent with Integrated Policy Framework of IMF.
Conclusion
India’s de-dollarisation should be viewed as de-risking rather than dollar displacement. A gradual shift towards local-currency settlement, deeper rupee markets and interoperable payment systems can enhance trade resilience and reduce exposure to external financial shocks. However, retaining adequate dollar liquidity and strengthening macroeconomic fundamentals remain essential. Thus, India should pursue currency diversification with financial stability, supporting a more multipolar global monetary system.