For decades, the US dollar has been the dominating currency for international transactions and investments. However, several nations have begun looking forward to alternatives to the US dollar in an effort to become less reliant on the US economy. Nations are shifting from using the US dollar to utilising their own national currency for the purpose of international trade and finance, and this shift from US dollar to home currency is called “de-dollarization”. Russia and China are among the countries that have embraced this procedure in recent years in an effort to curtail their reliance on the US economy.
According to data from the International Monetary Fund’s Currency Composition of Official Foreign Exchange Reserves (COFER) database, dollar’s proportion in global foreign exchange reserves has been falling in recent years. The percentage of global foreign exchange reserves held in US dollars reached an all-time high of about 72% in 2001, before beginning a gradual decline since then. According to the most recent COFER data, the percentage of worldwide foreign exchange reserves held in US dollars fell from 63.3% in Q4 of 2014 to 58.4% in Q4 of 2022. While popularity of dollar is tumbling, the Euro and the Japanese Yen are gaining in acceptance in the global markets. Brazil and Argentina, the two largest economies in South America, recently discussed the possibility of creating a unified currency.
Former leaders from several Southeast Asian countries discussed the ongoing attempts to de-dollarize their economies. Furthermore, discussions between the UAE and India to trade non-oil goods in Indian rupees are at an early stage. For the first time in nearly half a century, Saudi Arabia will accept transactions in currencies other than the US dollar. Progressively, nations and financial organisations are looking for ways to lessen their reliance on the US dollar in international trade and finance, as evidenced by the statistics. Concerns over US monetary policy, US sanctions, and transaction costs have led to a growth in the practice of de-dollarization in international trade and finance. De-dollarization will be a prominent trend in the future years, especially in emerging nations, notwithstanding the continued dominance of the US dollar in international financial markets. There are various lenses through which the effect of de-dollarization may be examined on Indian economy. Conceivably, by using our own currency for international trade with many countries, India would be able to set its own interest rates, control the money supply, and respond to changes in the economy more effectively. This would allow India to be more self-reliant and less dependent on external factors. Another advantage of de-dollarization is that it could reduce the currency risk faced by India. India is highly susceptible to changes in the value of the US dollar because it is the most widely used currency in international trade. India can lessen this threat and create a more secure market for businesses and investors by utilizing its own currency. India’s domestic sectors might benefit from de-dollarization as well, leading to additional job opportunities. India may improve conditions for its local businesses and sectors if it adopted its own currency.
In order to conduct business abroad, generally Indian companies convert INR to dollars. Due to fluctuations in the exchange rate and associated transaction costs, this leads to additional cost to business. India can benefit domestic enterprises by lowering transaction costs by switching the international transactions into INR. As a result, Indian companies may see a rise in their profits and enhanced ability to compete in international markets. There may be an increase in available jobs if domestic companies grow in response to rising profitability and competitiveness. With a thriving local sector, India may be able to entice more international investment and reduce its unemployment rate.
The potential increase in India’s borrowing rates is a key drawback of de-dollarization. Investors are willing to take lower interest rates on US dollar-denominated bonds since the dollar is now seen as a safe haven currency. It is possible that India would have to pay higher interest rates on its debt if it adopted its own currency. India’s access to international markets may be hampered if the country de-dollarizes. India may find it more difficult to break into foreign markets if it adopts a currency other than the US dollar. The country’s long-term economic growth and competitiveness could be harmed as a result. De-dollarization may also increase the uncertainty of currency prices. The instability of the Indian rupee’s value may cause problems for Indian enterprises and investors. Because of this, they might have trouble making long-term plans, which could cause economic instability. In sum, de-dollarization may bring India both benefits and drawbacks. While it has the potential to provide India more leeway in monetary policy, lessen currency risk, and stimulate domestic businesses but on the other hand, borrowing costs could rise, access to international markets could be restricted, and currency fluctuations could increase. The decision to undertake de-dollarization would ultimately depend on weighing these considerations against the potential advantages and costs to the Indian economy in the long run.
Dr. Neha Seth is Senior Assistant Professor, School of Commerce and Management, Central University of Rajasthan, Ajmer.