Global Push for De-Dollarization

Mains Marks Booster     27th July 2023        
Samadhaan

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.

Advantages

  • 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.

Challenges

  • 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.

Conclusion

  • 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.
Samadhaan