New Delhi, India, July 22: As the world faces economic difficulties, such as depleting dollar reserves and uncontrollable devaluation of local currencies, discussions on reducing reliance on the U.S. dollar have gained momentum. Known as “de-dollarization,” this shift has become a focal point in global talks.
India has emerged as a prominent advocate of de-dollarization, with the Indian rupee set to become the official currency of South Asia.
“Towards De-dollarization”
In recent years, the pandemic-driven supply-chain crisis and the ongoing Ukraine conflict have triggered significant global inflation and depletion of dollar-dominated foreign currency reserves, particularly affecting developing countries. This has led to a balance of payment crisis, causing economic challenges worldwide.
Furthermore, the imposition of Western sanctions against Russia has intensified the food-fuel-fertilizer crisis and also exposed the “weaponization of the dollar” by the United States for its strategic interests.
In response to these challenges, developing countries are now pushing for “de-dollarisation” by promoting the use of local currencies for bilateral trade transactions.
The BRICS nations, comprising Brazil, Russia, India, China, and South Africa, have been leading discussions on “de-dollarization” and exploring the possibility of launching a BRICS Currency to replace the dollar in bilateral trade.
Among them, India has been successful in its pursuit of “internationalization of the Rupee” by institutionalizing its use for bilateral trade settlements.
According to official disclosures in the Indian parliament, 22 countries have already opened special Vostro accounts in India to conduct trade transactions in Indian Rupees.
Agreements have been signed with several countries such as the UAE and France to formalize trade in Indian Rupees.
“Rupee to be the Official South Asian Currency”
India’s efforts have not only promoted the Rupee for bilateral trade within the region but have also led to increasing acceptance of the Indian Rupee as legal tender or a hard currency in local transactions in South Asian countries.
Bhutan and Nepal widely accept the Indian Rupee up to the denomination of INR 500 for local transactions, complementing their own currencies.
Bangladesh recently signed a bilateral trade agreement with India, making it the 19th nation to conduct trade transactions in Indian Rupees. India-Bangladesh trade touched around US$ 18.2 billion in 2021-22.
Additionally, Maldives has opened a Vostro account in an Indian bank to facilitate bilateral trade with India worth US$ 323.29 million.
On July 20, Indian External Affairs Ministry in weekly media interaction disclosed that Sri Lanka has notified the Indian rupee as a designated currency for trade as well as local transactions.
Unlike other South Asian countries, India boasts substantial foreign exchange reserves, amounting to over US$ 600 billion, making the Indian Rupee relatively stable in the unstable exchange rate market.
This stability has attracted attention, and there is growing support for accepting the Indian Rupee as a regional currency in South Asia, potentially complementing or replacing local currencies.
Former Sri Lankan President Mahinda Rajapaksha had proposed Indian Rupee to be accepted as a regional currency and now, businesses across the region have expressed interest in this proposal.
Though, the proposal to realize must go through intense socio-political pressure in the Indian neighborhood particularly in Bangladesh and Maldives.
Additionally, more challenges persist due to the continued dominance of the U.S. Dollar as the global reserve currency. Currently, approximately 88% of global trade transactions are conducted in dollars, while the Indian Rupee is used for only 1.8% of such transactions.
Achieving complete de-dollarization is unlikely in the near future.
Moreover, the China factor cannot be ignored as China is also pushing its Yuan as a reserve currency for bilateral and multilateral trade.
Nevertheless, growing interest in the Indian Rupee for trade transactions, coupled with India’s promotion of digital transactions internationally using its Unified Payments Interface (UPI) and Rupay payment gateway for Indian tourists and traders, could pave the way for the Indian Rupee to become an international reserved currency in the upcoming decades.
While realizing full “internationalization” may be a distant prospect, analysts suggest that the Indian Rupee could gain acceptance as a reserve and legal currency beyond South Asia, extending to the Indian Ocean Region and West Asia, as it was used during the 1960s.
