Is dedollarisation a step towards rupeefication?

Countries around the world are working to lessen their dependency on the US dollar in international trade by exploring bilateral currency accords and measures such as rupeefication.

The main idea

Over the last century, a single currency has dominated the global economy, progressing from the pound sterling to the US dollar, which presently accounts for 59.02% of COFER. The US dollar’s dominance stems from its central position in international trade. India’s campaign for the use of the Indian Rupee in commerce exemplifies this tendency, which aims to strengthen economic autonomy.

What is meant by Dollarisation?

  • The use of the US dollar as a substitute for domestic currency: Dollarisation refers to the phenomena in which countries, to varied degrees, use the US dollar as a substitute for their domestic currency.

This practice can take several forms:

  • Financial dollarisation (the replacement of domestic assets and liabilities with foreign ones)
  • Real dollarisation is the process of linking domestic transactions to currency rates.
  • Transactional dollarisation refers to the use of the US dollar in domestic commerce.

Poor performance of the domestic currency:

  • Dollarisation is often induced by poor performance of the indigenous currency, which can be attributed to reasons such as political instability or economic uncertainty.
  • It can also be the effect of financial market liberalisation and economic integration, which leads to lower currency rate risk and increased capital inflows.
  • The dominance of the US dollar: The dominance of the US dollar as an anchor currency for international trade adds to its widespread acceptance and high demand, promoting dollarisation trends.

What is meant by De-dollarisation?

  • The global trend of countries lessening their reliance on the US dollar in international trade and financial activities is referred to as de-dollarisation.
  • This trend include turning towards bilateral currency agreements, trading in domestic currencies, and promoting alternatives to the dollar.
  • The goal is to attain greater economic autonomy, decrease the risks associated with currency volatility, and challenge the US dollar’s dominance in the global financial system.

What exactly is Rupeefication?

  • The process of internationalising the Indian rupee (INR) by increasing its use in international trade and financial activities is known as rupeefication.
  • This strategy entails allowing trade partners to transact in INR, issuing INR-denominated financial instruments to foreign firms, and promoting broader access to the INR in global markets.
  • The goal of rupeefication is to elevate the INR’s standing as a worldwide currency, reduce reliance on the US dollar, and boost India’s economic resilience and global autonomy.

De-dollarisation in motion

  • Brazil is expanding bilateral currency trade agreements, particularly with Japan and China. These accords call for trade to be conducted in domestic currencies, minimising dependency on the US dollar.
  • China’s De-Dollarisation Leadership: Following sanctions against Russia, China has been in the forefront of reducing reliance on the dollar. China’s initiatives have led other BRICS countries to reduce their reliance on the currency.
  • Indonesia’s Local Currency Trade System: To reduce the use of the US dollar in its current account operations, Indonesia has implemented a Local Currency Trade (LCT) system. This change is intended to encourage increased use of home money.
  • Africa’s Consideration for Intra-Africa commerce: African states are considering substituting native currencies for the US dollar in intra-Africa commerce. This strategy is consistent with the greater worldwide trend of de-dollarization.
  • The forthcoming BRICS Summit will address the issues of de-dollarizing commerce and developing an integrated payment system. This underscores the growing worldwide emphasis on reducing reliance on the currency.
  • India’s Multifaceted Approach: In addition to de-dollarization, India is considering bilateral currency agreements. However, because to current economic ties with the US and Europe, it may opt out of a joint BRICS currency.

How is India actively developing technologies to bypass the US currency and strengthen the INR?

  • Bilateral Currency accords: India has bilateral currency accords with a number of countries. These agreements encourage trade partners to interact in INR rather than USD, lowering the dollar’s dependency in international trade transactions.
  • Special Rupee Vostro Accounts (SRVAs): India has Special Rupee Vostro Accounts with a number of nations, including the United Kingdom, Russia, Sri Lanka, and Germany. These accounts allow international entities to interact directly in INR with Indian banks, hence encouraging the usage of the Indian currency.
  • Currency Internationalisation: By encouraging the use of INR in foreign transactions, India hopes to boost its currency’s acceptance in worldwide markets. This plan includes measures to increase the recognition and use of the INR beyond its borders.
  • Reducing Dollar Dependence: India’s efforts to establish systems that do not rely on the US dollar are intended to minimise the country’s reliance on the US dollar for international trade and financial transactions. This can increase India’s economic autonomy while mitigating the dangers associated with currency swings.
  • Improving the INR’s Global Role: Improving the INR’s global role entails making it a viable alternative to the US dollar in global transactions. India hopes to boost the currency’s worldwide relevance by developing mechanisms that facilitate its usage in trade and finance.

The Benefits of Rupeefication

  • Risk Mitigation for Exporters: Rupeefication allows exporters to lower their exposure to exchange rate risks. Exporters can avoid the uncertainty associated with shifting US dollar exchange rates by invoicing trade in INR, increasing the predictability of their earnings.
  • Deeper Markets and Broader Access: Rupeefication can lead to better market access and deeper commercial partnerships. As the INR obtains recognition, exporters will be able to enter new markets and grow their consumer base.
  • Lower Borrowing Costs for the Private Sector: Rupeefication allows the private sector to gain access to international financial markets at a lower cost. Businesses may benefit from increased profitability and investment opportunities as a result of this.
  • Flexibility in Public Sector Financing: The capacity to issue international debt denominated in INR favours the public sector. This provides an alternate source of funding for government initiatives without reducing the government’s official US currency holdings.
  • Economic Autonomy: By encouraging rupeefication, India can progressively diminish its reliance on the US currency, resulting in more economic autonomy. This decreases exposure to external economic shocks and currency changes.
  • Microeconomic Growth and Livelihoods: A concentration on rupeefication stimulates private sector growth, resulting in increased economic activity and job prospects. This method has the potential to improve livelihoods in a variety of areas.
  • Increased Monetary Policy Autonomy: As the rupee develops strength, India will be able to exert more influence over its domestic monetary policy. This autonomy enables personalised economic actions that are adapted to the country’s individual needs.

Possibilities for implementation difficulties

  • Volatility of the exchange rate: If the INR’s value changes dramatically versus other major currencies, firms may be exposed to exchange rate volatility. This could have an impact on earnings predictability and increase risks for exporters.
  • Limited adoption in International Markets: It may be difficult to get widespread adoption of the INR in worldwide markets. Many foreign transactions are still handled in US dollars, which may impede the smooth implementation of rupeefication.
  • External Economic and Political developments: External economic and political developments can have an impact on the viability of rupeefication. Global variables like as economic crises or geopolitical conflicts may influence other countries’ willingness to engage in INR transactions.
  • Trade Balance and Reserves: A rapid shift to rupeefication could have an impact on India’s trade balance and foreign exchange reserves, potentially demanding more foreign currency reserves to handle trade imbalances.
  • Gradual Implementation: A sudden shift to rupeefication may cause economic difficulties.
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