De-dollarisation

IN NEWS:

• BRICS, comprising Brazil, Russia, India, China and South Africa is reportedly working on a common currency to replace the US dollar. The move called De-dollarisation has been initiated by Moscow and Beijing.

DOLLAR AS RESERVE CURRENCY:

• Dollar became the official reserve currency of the world in 1944 as a result of a decision made by a delegation from 44 Allied countries, called the Bretton Woods Agreement.
• It established the authority of central banks, which would maintain fixed exchange rates between their currencies and the dollar. In turn, the United States would redeem U.S. dollars for gold on demand.
• Countries had some degree of control over currencies. In situations wherein the values of their own currencies became too weak or too strong relative to the greenback (dollar), they could buy or sell their currency to regulate the money supply.
• However, in the 1960s and 70s, the demand for gold was such that President Richard Nixon de-linked the dollar from gold, which led to the floating exchange rates that exist today.
• Today, Central banks hold around 59% of their reserves in U.S. dollars, according to the International Monetary Fund (IMF). Many of the reserves are in cash or U.S bonds.

DE-DOLLARISATION:

• De-dollarisation refers to reducing the dollar’s dominance of global markets. It is a process of substituting US dollar as the currency used for:
  • Trading oil and/ or other commodities
  • Buying US dollars for the forex reserves
  • Bilateral trade agreements
  • Dollar-denominated assets
• Countries like Russia and China seek to end the hegemony of the dollar & the US. The De-dollarisation move initiated by them aims at reducing the dollar’s dominance in global markets & substitute the US dollar as the currency used for trading oil and/or other commodities by a new medium for payment.

SHOULD INDIA SUPPORT DE-DOLLARIZATION?

YES:

• Weaponisation of dollar:
  • The dollar is often used by the US as a tool to achieve its foreign policy goals. Eg: Through sanctions. Such threats to sovereignty can be avoided through de-dollarization.
• Continue trade relations during crisis:
  • The use of currencies other than dollar in international trade settlements is an important step to facilitate trade with Russia, Iran and Sri Lanka.
  • Eg: Normally, India would have had to pay Russia in dollars for oil purchases. Now, the same payment can be done through the rupee-ruble route.
• Size of BRICS:
  • The BRICS group of nations accounts for one-third of global economic output, and their combined output is larger than the Group of Seven economies by some measures. Hence, a common BRICS currency could effectively challenge the Dollar’s hegemony.
• Stabilise forex reserves:
  • Countries are affected by US interest rate hikes: a stronger dollar curbs global trade. Replacing the Dollar with other currencies would reduce the outflow of US dollars. This would allow the central bank leeway to conserve its forex reserves and deploy it to keep the rupee stable.
• Reduce trade deficit:
  • The US dollar has been going through a phase of strength against most currencies in the world. By trading in currencies other than dollar, India can reduce its trade deficit.

NO:

• Safest currency:
  • The trust and confidence that the world has in the ability of the United States to pay its debts keep the dollar as the most redeemable currency for facilitating world commerce.
• Size of economy:
  • The reserve status is based largely on the size and strength of the U.S. economy and the dominance of the U.S. financial markets. Since U.S. economic growth is less dependent on the rest of the world, it increases the attractiveness of dollar-denominated assets for foreign investors.
• Impact on India-US relations:
  • Russia has been vocal in using trade in local currency for the overall process of “de-dollarisation”. However, invoicing in Indian Rupee and not depending on US Dollar may upset India’s relationship with the US.
• Weak alternatives:
  • Renminbi’s (RMB) global usage is still limited by its lack of financial market development and capital account restrictions. For it to be the reserve currency, China would have to be willing to alter its economic framework so that its economy plays the same role as that of the United States. Given China’s current political arrangements, this is a distant possibility.
  • Another alternative, digital currencies, is in its nascent stage of development.
• Tensions in India-China relations:
  • Taking into consideration the belligerence of China towards India & its support to Pak-sponsored terrorist activities, it would be wise for India to side with the US than China when it comes to de-dollarisation.
• Support for rule of law:
  • Unlike the Yuan or Ruble, the dollar support of the rules-based world order. This reinforces its acceptability and the USA’s dominance in world affairs.
• Impact on service sector:
  • It may have an indirect impact on services sector for which India is dependent on developed markets like the US and Europe.

CONCLUSION:

India is unlikely to play an explicit role in any BRICS plan to reduce the influence of US dollar, but can help minimise dollar dependence, by supporting initiatives that promote the use of local currencies in trade and finance.

Also, despite large deficit spending, trillions of dollars in debt, and the unbridled printing of U.S. dollars, U.S. Treasury securities remain the safest way to store money. Hence, unless there are some revolutionary events in the global fora, dollar will continue to be the dominant currency of the world.

PRACTICE QUESTION:

Q. What do you understand by de-dollarisation. Critically examine whether India should support efforts aimed at de-dollarisation.