India and Malaysia have agreed to settle trade in Indian rupees, a step towards de-dollarisation of India’s international trade. The Union Bank of India has opened a Special Rupee Vostro Account through its corresponding bank in Malaysia, India International Bank of Malaysia, becoming the first bank in India to operationalise this option. Trade between India and Malaysia can now be settled in Indian Rupee in addition to other currencies.
The initiative by RBI aims to facilitate the growth of global trade and support the interests of the global trading community in Indian rupees. This move comes as many countries are exploring the possibility of moving away from the US dollar for trade purposes, raising concerns about the future dominance of the currency.
What is de-dollarisation?
De-dollarisation refers to the process of reducing reliance on the US dollar as a means of international trade and investment and moving towards using other currencies or alternatives. The de-dollarisation by several central banks is imminent, driven by the desire to insulate them from geopolitical risks, where the status of the US dollar as a reserve currency can be used as an offensive weapon.
Why de-dollarisation?
The ongoing Russia-Ukraine conflict is leading to the exploration of the possibility of moving away from the dollar for trade purposes, raising concerns about the future dominance of the currency. De-dollarisation is also an effort to create a new payment system and to create a multipolar world where each country will look to enjoy economic autonomy in the sphere of monetary policy.
Which countries are de-dollarising?
Leading geopolitical adversaries of the US, Russia, and China have already started the process of de-dollarisation. Other smaller powers are also joining the ranks. India has also had to work out alternative arrangements, including a barter arrangement, with certain sanctioned countries in the past.
What Russia and China have done in this direction?
- Russia reduced its share of dollar-denominated assets and trade by prioritizing national currencies in bilateral trade.
- The use of USD in Russia’s exports to BRICS dropped from 95% in 2013 to less than 10% in 2020.
- Russia developed a national electronic payments system called “Mir” in 2015 after several payment processing firms denied services to Russian banks.
- China aims to use trading platforms and its digital currency to promote de-dollarization.
- China has established RMB trading centers in Hong Kong, Singapore, and Europe.
- The People’s Bank of China submitted a “Global Sovereign Digital Currency Governance” proposal at the Bank for International Settlements to influence global financial rules via its digital currency, the e-Yuan.
How the dollar cemented its position in the global market:
Despite these efforts, the US dollar continues to reign, having sealed its position in the early 1970s with a deal with the oil-rich Kingdom of Saudi Arabia to conduct global energy trade in dollars. The status of the dollar was enhanced by the collapse of the Bretton Woods system, which eliminated other developed market currencies from competing with the USD. This status of the reserve currency allows the US government to refinance its debt at low costs in addition to providing foreign policy leverage.
Way forward
Currently, about 60% of foreign exchange reserves of central banks and about 70% of global trade is conducted using USD. Given the psychological bias, the world will continue to prefer the USD as a “store of value” and a “medium of exchange,” fulfilling the basic functions of money. Additionally, sudden dumping of dollar assets by adversarial central banks will also pose balance sheet risks to them as it will erode the value of their overall reserves. However, the de-dollarisation by several central banks is an effort to create a multipolar world where each country will look to enjoy economic autonomy in the sphere of monetary policy.
Why In News
India and Malaysia have taken a significant step towards reducing their dependence on the US dollar by agreeing to settle trade in the Indian rupee. This move is expected to increase the use of the Indian currency in the international market, strengthening its position as a global currency.
MCQs on The challenge of de-dollarisation
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What is de-dollarisation?
A. The process of increasing reliance on the US dollar as a means of international trade and investment.
B. The process of reducing reliance on the US dollar as a means of international trade and investment and moving towards using other currencies or alternatives.
C. The process of banning the use of US dollar for international trade and investment.
D. The process of creating a new international currency to replace the US dollar.
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Which countries are de-dollarising?
A. Only India and Malaysia
B. Only Russia and China
C. Only the US
D. All countries in the world
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How did the US dollar cement its position in the global market?
A. By making a deal with the oil-rich Kingdom of Saudi Arabia to conduct global energy trade in dollars
B. By creating a new international currency to replace all other currencies
C. By forcing other countries to use the US dollar for all international trade
D. By making it illegal to use any currency other than the US dollar for international trade
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