Recently, RBI Governor clarified that India has not taken steps toward de-dollarisation and is rather focused on de-risking its domestic trade from geopolitical upheavals.
What is de-dollarization?
- About: It aims to reverse dollarization (historical domination of US dollar in global market) causing a significant reduction of its use in world trade and financial transactions.
- Recent Trends: Countries like India, Brazil, Russia, China and Indonesia are shifting to local currency trade to challenge US dollar dominance.
- India has allowed trade invoicing in Indian Rupees (INR) with various countries, including Russia.
- The recent BRICS Summit (Kazan, 2024) also discussed the potential for a common BRICS currency.
Why are countries moving towards De-dollarization?
- Reduction of Exchange Rate Risk: It allows countries to trade in their local currencies, minimizing the risks associated with fluctuations in the US dollar's value.
- Enhanced Monetary Policy Control: Countries can implement strategies suitable to their economic conditions without being influenced by US Dollar.
- Geo-political benefits: Shift the balance of power challenging US dominance and its weaponisation of dollar through sanctions, etc.
What are the challenges associated with De-dollarization?
- Affect Financial Transactions: As many commodities, like oil, gold, etc. are currently priced and exchanged in dollars.
- Financial Instability: Abruptly abandoning dollar might expose domestic currencies with risks like fluctuating exchange rates, expensive debts, etc.
Conclusion: In case of India, de-dollarisation can be complemented with internationalisation of Ruppee—rupeefication, that would provide complete freedom over buying or selling of the rupee by an entity.
