INR’s Journey From De-dollarisation To Rupeefication

Since the 19th century, the global financial space has been dominated by a single currency. The US dollar has been on the throne for over 80 years, and it is time that this changes. Did you know that despite being the world’s reserve currency, the greenback is only the tenth strongest currency in the world, with India coming in at 15? The INR to USD exchange rate might not reflect this. Could this pave the way for de-Dollarisation?

In July 2023, India signed a pact with the UAE to pay for oil in INR. A similar agreement exists for Russian oil imports. Given that India imports crude oil from 39 countries, there is wide scope for similar pacts with other nations. Could this lead to Rupeefication? And does de-dollarization automatically mean Rupeefication? Here’s what you should know.

What is De-Dollarisation and Why Are Nations Rooting for It?
De-dollarisation is an attempt to reduce global reliance on the US dollar for trade, reserves, and currency benchmarking.

The US economy has significant control over the economic health of other nations. The country has a large debt, which influences inflation at the global level. Any inefficiencies in the American financial market threaten global economic stability. India and other countries realise that they must shield themselves from external risks and this is only possible by reducing exposure to a dollar-centric system.

Dependence on a single currency reduces the agency of a country’s government on its economic policies. The US has multiple geopolitical conflicts. Sanctions are a way to weaponize its currency to influence the trade of rival nations and hence their financial standing. However, this does not bode well for emerging economies. They still want to trade with diverse nations. Take Russia, for instance. The US imposed multiple sanctions on Russia to freeze billions of dollars following the invasion of Ukraine. But that did not deter China or India. Both still managed to trade without USD, as they stood in favour of creating a multipolar global financial ecosystem.

De-dollarisation is Happening 
Goldman Sachs had warned in 2020 that the influence of the US dollar on gold prices might be declining. Morgan Stanley confirmed this in one of its 2023 reports. The parallel rise in the price of gold and DXY in April 2024 is yet another confirmation. such anomalies emphasize that dollar dominance is in facing challenges.

A move away from the greenback is evident in the IMF’s latest Currency Composition of Official Foreign Exchange Reserves (COFER) report, the share of the US dollar declined to 54.2 per cent in Q4 2023, from over 70% in the early 2000s and over 60% 10 years ago. The pace of de-dollarization and the diversity of reserve currencies have increased. Excluding the major currencies, the reserves in other currencies have risen from 3.2% in Q4 2022 to 3.6% in Q4 2023, representing a difference of nearly $60 billion in one year.

The Dollar Isn’t Going Down Easy
Transitioning from a uni-currency to a multi-lateral financial system has its challenges. Be it the greenback or any other currency, this is a tectonic shift and the global economic ecosystem is bound to feel the tremors, even if it happens slowly.

The scenario complicates international transactions and the valuation systems for goods and services.

Foreign direct investment and capital flows may face friction as the currencies of major economies race to become the next king.

Global debt is dollar-denominated. Devaluation and unpredictable fluctuations in exchange rates will affect their financial stability.

Volatility in the forex markets will certainly increase. However, how this unfolds remains to be seen as the transition is slow and central banks worldwide are treading the narrow lane cautiously.

Potential of Rupeefication
India is a key driver of developing a global system that bypasses the greenback. To enable bilateral trade with 22 countries, the RBI had approved 92 Special Rupee Vostro Accounts (SPRA) by mid-2023 to execute trades in INR. As an essential part of the BRICS+ community, India is actively contributing to a strategic shift away from USD. The formation of the New Development Bank (NDB) is proof of the nation’s commitment to diminishing the dominance of the World Bank and IMF.

Strengthening geopolitical and economic ties are paving the way for Rupeefication. However, despite immense potential and multi-dimensional moves, there still is a long road to making INR the desired currency for trade across the world. These include stabilising the economy, exercising greater autonomy on domestic monetary policy, and fostering a Rupee-based settlement system that works globally.
 

Nimesh Sanghavi

Guest Author Associate Director, Product and Technology, BlinkX by JM Financial