Introduction: BRICS Collective's Common Currency: BRICS nations aim to establish a common currency, reducing reliance on the US dollar and challenging its dominance in the global financial system. De-Dollarization in Response to Western Sanctions: Russia and China advocate for de-dollarization to decrease vulnerability to Western sanctions and assert economic independence.
Background of the News: Rethinking the Global Currency
- Talks of Creating a New Currency: Diminishing Dollar Influence Discussions about a new global currency emerge, seeking to reduce the dominance of the US dollar in international trade and financial transactions.
- Urgency Amplified by the Russia-Ukraine Conflict: emphasizing the vulnerability of countries to dollar-based sanctions.
- Alternative Payment Methods: BRICS nations explore non-dollar and non-euro payment methods, aiming to establish a diversified and inclusive financial system.
What is De-Dollarisation?
- Dollar's Influence: Disproportionate Control and Sanctions Tool The US dollar grants disproportionate influence to the US and is used as a tool for imposing economic sanctions.
- Defying Dollar Hegemony: Russia and China's Stand Russia and China resist dollar hegemony, aiming to reduce dependence on the dollar and explore alternative currencies for international transactions.
- Substituting the Dollar: finding substitutes for its use in trading oil and commodities.
- Impacts of Sanctions: Freezing Reserves and Expulsion from Payment Systems Sanctions imposed on countries like Russia have led to freezing reserves and exclusion from international payment systems, prompting the need for de-dollarisation.
- Global Shift: Trading in National Currencies (e.g., Rupee and Yuan) Countries like India and China shift towards trading in their national currencies, signalling a global shift away from the dollar.
Impact of De-Dollarization
- Decrease in Demand for the US Dollar
- Weakening US Influence in global financial affairs.
- Volatility in Currency Exchange Rates may affect international trade and make it more challenging.
- Potential Benefits for Other Currencies such as the euro and yuan, leading to increased demand and international usage.
India's Plan: Internationalization of the Rupee
- Increasing Use of Rupee in Cross-Border Transactions: India aims to increase the use of the rupee in cross-border transactions as part of its internationalisation strategy.
- Reserve Bank of India's Mechanisms: The RBI has implemented mechanisms to facilitate and simplify rupee-based international trade.
- Growing Interest in Rupee Trade Mechanism: Several nations have shown interest in learning about the rupee trade mechanism, indicating a potential shift towards trading in rupees.
- Reducing Currency Risk
- Resilience to External Shocks
- Reduced Need for Holding Foreign Exchange Reserves
- Increased Bargaining Power Indian businesses can enjoy increased bargaining power, strengthening the country's global economic standing.
- Diminished Role for Convertible Currencies: A reduced role for convertible currencies may result in lower reserve accretion, posing challenges for countries in managing their reserves.
- Volatility in Domestic Financial Markets: Non-residents' holdings of rupee-denominated assets can contribute to volatility in domestic financial markets, affecting stability.
- Signing Rupee Trade Agreements: India should sign more rupee trade agreements, particularly with countries facing deficits, to improve bilateral trade prospects.
- Reducing Reliance on the US Dollar: By reducing reliance on the US dollar and promoting the use of the rupee, India seeks to reshape trade dynamics and decrease vulnerability to dollar fluctuations.
- Small Steps Towards Change: While the rupee may not become a global reserve currency like the dollar, increased usage in bilateral trade paves the way for a new trade paradigm.