Key Takeaways :
1. A key reason India is not supporting de-dollarization is the rise of the Chinese yuan as a potential competitor to the US dollar. India has refrained from using the yuan for imports of Russian oil, despite the increasing acceptance of this currency in Russia.
2. However, India is cautious about becoming overly dependent on the dollar. The RBI has ramped up its gold purchases and has started repatriating gold that was previously held overseas back into the country.
Dollarisation
1. Dollarisation is the process by which a country decides to recognize the U.S. dollar (stronger currency) as a medium of exchange alongside or in place of its domestic currency. It is a form of currency substitution where governments may choose to partially or fully adopt a foreign currency.
2. For the past 80 years, the US dollar has been the dominant global reserve currency. Central banks, corporations, and travelers rely on the dollar to facilitate international trade and financial transactions. Today, the dollar is the most widely held reserve currency, playing a role in an estimated $6.6 trillion in daily transactions. Its supremacy underpins the global financial system.
3. Notably, the history of the beginning of ‘Dollarisation‘ goes back to the Bretton Woods Conference of 1944, which redefined the global monetary order with participation from 44 Allied countries, including the US, Canada, and much of Western Europe.
Under the Bretton Woods system, the dollar’s centrality was reinforced by its role in international transactions and trade.(Representational)
4. In response to Europe’s need for financial stability post- second world war, the US established the dollar as the central reserve currency, pegging global currencies to it and making it convertible to gold at a fixed rate. This framework fostered stability in international trade and solidified the dollar’s dominance in the global economy. Under the Bretton Woods system, the dollar’s centrality was reinforced by its role in international transactions and trade.
5. The global dominance of the U.S. dollar can be observed in several ways, including:
(i) Central banks hold reserves of various currencies to settle international claims, intervene in foreign exchange markets, or maintain emergency funds. In this context, the share of U.S. dollar reserves is typically the highest.
(ii) The dollar is dominant for transactions between non-U.S. exporters and importers.
(iii) Commodities such as oil and gold are typically denominated in U.S. dollars, as are benchmark futures such as Brent.
(iv) Gulf oil producers peg their currencies to the dollar to avoid risk from fluctuations when invoicing their sales.
(v) The dollar’s supremacy was highlighted in 2018 when Washington decided to reimpose sanctions on Iran and all those doing business with it – any country breaking sanctions risked having access to dollars cut off.
De-dollarisation
1. De-dollarisation, in simple terms, is the process of reducing dependence on the dollar. Discussions about ‘de-dollarization’ have gained momentum in recent decades. This trend is driven by U.S. sanctions and a growing shift toward multipolarity.
2. Countries such as China and Russia are increasingly using the Chinese renminbi (RMB) for trade. The BRICS bloc is also exploring the possibility of creating a new common currency to reduce their dependence on the U.S. dollar.
3. In this context, US President-elect Donald Trump has criticized a potential rival currency from BRICS nations, threatening steep tariffs. His stance underscores a serious concern about the dollar’s role as the primary reserve currency, which provides the U.S. with significant economic and political power—a privilege it is unlikely to give up easily.
BEYOND THE NUGGET: Rise in use of Non-Traditional Reserve Currencies
1. The IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) has pointed to a gradual decline in the US dollar’s share of central bank and government foreign reserves. However, this decrease in the dollar’s dominance over the past two decades has not been accompanied by significant increases in the shares of other major currencies, such as the euro, yen, and pound, according to the IMF.
2. “Rather, this has been accompanied by a rise in the share of what we refer to as non-traditional reserve currencies, including the Australian dollar, Canadian dollar, Chinese renminbi, South Korean won, Singaporean dollar, and the Nordic currencies,” the IMF said in July.
3. Notably, the IMF said that among the non-traditional reserve currencies, the Chinese renminbi is gaining significant market share, with its growth offsetting a quarter of the decline in the dollar’s dominance.
Internationalisation of Rupee
“We have never actively targeted the dollar. That’s not part of our economic, political, or strategic policy. Some others may have done so. What I will say is that we have a natural concern. We often have trade partners who lack dollars for transactions. So, we must decide whether to forgo dealings with them or find alternative settlements that work. There’s no malicious intent towards the dollar,” said External Affairs Minister S Jaishankar
1. Since the United States removed Iran and Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), which is essential for international financial transactions, countries around the world, including India, have sought to reduce their dependence on the US dollar and the US-led global financial system.
2. In 2022, the RBI initiated an effort to reduce dependence on the US dollar and internationalize the rupee by allowing invoicing and payments for global trade in rupees. This decision followed the imposition of sanctions on Russia amid the Ukraine war.
3. Internationalisation of the Rupee aims to promote the Indian rupee as a global currency in trade, increasing its international acceptance and usage.
(Sources: Why does RBI want a hedge against dollar reliance, but not push for de-dollarisation?, Trump threat to BRICS, How the US Dollar emerged as the global reserve currency in the post-World War II era, Dollar domination)
For your queries and suggestions write at roshni.yadav@indianexpress.com
The Indian Express UPSC Essentials brings to you the November issue of its monthly magazine. Click Here to read. Share your views and suggestions in the comment box or at manas.srivastava@indianexpress.com
Subscribe to our UPSC newsletter and stay updated with the news cues from the past week.
Stay updated with the latest UPSC articles by joining our Telegram channel – Indian Express UPSC Hub, and follow us on Instagram and X.
The Bretton Woods conference of 1944 established the dollar as the global reserve currency. (AI generated image) 
Under the Bretton Woods system, the dollar’s centrality was reinforced by its role in international transactions and trade.(Representational)
Share
