Global Push for De-Dollarization and India’s Strategic Role

After Reading This Article You Can Solve This UPSC Mains Model Question:

“De-dollarisation is increasingly discussed as both an economic and geopolitical strategy in the emerging multipolar world.”Examine the drivers of de-dollarisation and critically analyse its implications for India and the global economy. (15 Marks/250 words) (GS-3 Economy)

Context:

Recent geopolitical tensions, U.S. sanctions on countries like Russia, aggressive U.S. monetary tightening, and discussions within BRICS on local-currency trade have renewed global debates on de-dollarisation, prompting emerging economies, including India, to diversify trade settlements and foreign exchange reserves without fully abandoning the U.S. dollar.

What is De-dollarization?

De-dollarization is the process by which nations reduce their reliance on the U.S. dollar (USD) as the primary reserve currency, medium of international trade, and unit of account.

Main Drivers of De-dollarization:

1. Geopolitical Driver: “Weaponization” of Finance

• Sanctions Overreach: The 2022 freezing of $300 billion in Russian assets served as a “wake-up call” for the Global South. Countries now fear that their sovereign reserves could be held hostage to U.S. foreign policy.
• SWIFT Exclusion: The removal of major banks from the SWIFT messaging system has forced nations like Russia, China, and Iran to build alternative rails (e.g., CIPS in China and SPFS in Russia).

2. Economic Driver: Monetary Policy Spillovers

• The “Export of Inflation”: When the U.S. Federal Reserve raises interest rates to combat domestic inflation, it causes capital to fly out of emerging markets like India and Brazil, leading to sharp currency devaluations.
• Fiscal Sustainability: There is growing global skepticism about the $34 trillion+ U.S. national debt. Many central banks are reducing their holdings of U.S. Treasuries to avoid being the “last ones holding the bag” if the U.S. faces a debt crisis.
• “Mar-a-Lago” Trade Volatility: Aggressive U.S. tariff threats (up to $100) on countries attempting to bypass the dollar have actually backfired, accelerating the desire for “monetary autonomy.”

3. Institutional Driver: The Rise of BRICS+

The expansion of BRICS to BRICS+ (including UAE, Iran, Ethiopia, and Egypt) has created a bloc that represents nearly 40% of global GDP.

• Petro-Yuan & Petro-Rupee: The move by Saudi Arabia and the UAE to accept non-dollar payments for oil (India paying for oil in INR) is a direct blow to the “Petrodollar” system that has sustained dollar dominance since the 1970s.
• BRICS Pay & m-Bridge: The development of a blockchain-based BRICS Pay system and the m-Bridge project (multiple central bank digital currencies) provides a technical bypass to U.S.-controlled financial infrastructure.

Advantages of De-Dollarization:

1. Greater Monetary Sovereignty
   Reduces excessive dependence on U.S. monetary policy (interest rate hikes, quantitative tightening), allowing countries to pursue domestic economic priorities.
2. Lower Vulnerability to Sanctions
   Minimises the risk of financial coercion and asset freezes arising from U.S.-led sanctions and control over dollar-based systems like SWIFT.
3. Diversification of Foreign Exchange Reserves
   Encourages holding reserves in multiple currencies and gold, reducing concentration risk and exposure to dollar volatility.
4. Reduced Exchange Rate Risk in Trade
   Trade settlement in local currencies lowers transaction costs and hedging risks for exporters and importers.
5. Strengthening Regional & South-South Trade
   Promotes regional financial arrangements and deeper economic cooperation among emerging and developing economies.
6. Financial Stability in the Long Run
   A multi-currency global system can reduce systemic shocks caused by abrupt changes in U.S. monetary policy.
7. Boost to Domestic Currency Internationalization
   Enhances the global role of national currencies, deepens domestic financial markets, and improves global economic standing.

Challenges of the De-Dollarization:

1. The Liquidity and Network Effect

The dollar’s primary strength is its ubiquity.

• Depth of Markets: The U.S. Treasury market remains the deepest and most liquid in the world, valued at over $27 trillion. No other market (not even the Eurozone or China) offers enough “safe assets” for global central banks to park trillions in reserves without causing massive price distortions.
• Network Effect: Since most of the world already uses the dollar, it is cheaper and easier for a merchant in Brazil to trade with one in Vietnam using USD rather than trying to find a direct BRL/VND exchange rate.

2. The “Convertibility” Gap

• Capital Controls: Unlike the dollar, the Chinese Yuan (RMB) is subject to strict capital controls.Global investors are hesitant to hold large amounts of a currency they might not be able to move freely during a crisis.
• The Rupee Challenge: While India is pushing for INR internationalization, the Rupee is not yet fully convertible on the capital account. This limits its use as a “store of value” for foreign central banks.

3. The “Trump Tariff” and Geopolitical Pressure

• The 100% Tariff Threat: The U.S. administration has explicitly threatened 100% tariffs on BRICS+ nations if they attempt to create a common “BRICS Currency” or actively sabotage the dollar.
• Trade Dependency: For countries like India, the U.S. remains the largest export destination. Risking this trade relationship for a theoretical currency shift is a “high-stakes gamble” that many are not yet willing to take.

4. Institutional Trust and Legal Certainty

• Rule of Law: Global contracts are overwhelmingly written under New York or English law. The dollar offers a level of legal predictability and institutional independence (via the Fed) that emerging market currencies currently lack.
• Transparency: Skepticism remains regarding the transparency of economic data from some de-dollarizing nations, which undermines the “trust” required for a reserve currency

Implications of De-Dollarisation for India and the Global Economy:

1. Implications for the Global Economy

• Fragmentation of Trade: The world is witnessing the rise of “currency blocs.” Trade is increasingly settled in regional currencies (Euro, Yuan, Rupee), which can lead to higher transaction costs due to the loss of a single, universal benchmark.
• Asset Reallocation: Central banks are diversifying away from U.S. Treasuries. Foreign holdings of U.S. debt dropped to nearly 25% in 2025, down from 34% a decade ago. This could lead to higher borrowing costs for the U.S. and upward pressure on global real yields.
• The Rise of “Safety” Alternatives: Gold has surged as a primary reserve asset. Central banks, including India’s, have increased gold’s share in their reserves (India’s share rose from 5.9% to 13.1% by early 2026) to hedge against “fiat volatility.”

2. Strategic Implications for India

India’s impact is described as “Cautiously Active.” It seeks to protect itself without inviting a trade war with the U.S.

• Monetary Autonomy: By using local currency settlement (LCS) for oil (e.g., with UAE and Russia), India reduces the “spillover effect” of the U.S. Federal Reserve’s interest rate hikes. This helps stabilize India’s import bills and domestic inflation.
• Strategic Autonomy vs. Pax Silica: While India pushes for the “Rupee-fication” of trade, its exclusion from certain U.S.-led tech initiatives (like Pax Silica) indicates the diplomatic friction caused by pursuing an independent financial path.
• The “Debt Trap” Buffer: With external debt at $663.8 billion (as of March 2024), de-dollarization helps India manage its debt servicing costs more effectively if the Rupee is used for repayment, preventing a “dollar trap” during Rupee depreciation.

3. The “Trump Tariff” Challenge

• India’s Resilience: The UN predicts India will grow at 7.2% in FY 2025-26. Resilient domestic consumption and public investment are expected to “largely offset” the impact of these U.S. tariffs.
• Exemptions and Offsets: Key Indian exports like electronics and smartphones are largely exempt from these tariffs, and growing demand from the Middle East and Europe is acting as a strategic buffer against U.S. protectionism.

Way Forward:

1. Strengthening the “Rupee-fication” Roadmap

• Deepening Market Liquidity: The RBI is expanding the use of Special Rupee Vostro Accounts (SRVAs), allowing foreign banks to invest surplus Rupee balances into Indian government bonds and commercial papers.
• Regional Hub for Trade: India has permitted banks to lend in Rupees to non-residents in Bhutan, Nepal, and Sri Lanka for trade, effectively creating a “Rupee Zone” in South Asia.
• Forex Benchmarking: To reduce dependency on the USD as a middle-man for pricing, the RBI is establishing transparent direct reference rates for major partner currencies like the UAE Dirham (AED) and Indonesian Rupiah (IDR).

2. Digital Infrastructure: The “New SWIFT”

• UPI-Global Integration: Expanding UPI and RuPay to more nations (currently active in 10+ countries) provides a retail-level bypass of dollar-denominated card networks.
• The mBridge & CBDC Launch: India is actively participating in the mBridge project, which uses Central Bank Digital Currencies (CBDCs) for instant, low-cost cross-border settlements that do not require U.S.-based clearing banks.

3. Strategic “Multi-Alignment” (The Balancing Act)

• Pragmatic De-dollarization: New Delhi’s official stance is that it is not “anti-dollar” but “pro-Rupee.” This distinction is vital to avoid the 100% tariffs threatened by the U.S. on nations actively trying to replace the dollar.
• Diversified Reserves: Gradually shifting a portion of forex reserves from U.S. Treasuries to Gold (which reached 13.1% of India’s reserves in 2026) and a basket of other stable currencies like the Euro and Yen.

4. Policy Reforms for Global Trust

• Capital Account Liberalization: Moving toward full convertibility of the Rupee in a “calibrated and phased manner” to build trust among global investors.
• Macroeconomic Stability: Ensuring low inflation and fiscal discipline to prevent the Rupee from being a “volatile” alternative to the dollar.

Conclusion:

“In the long run, de-dollarization should be viewed not as the ‘end of the dollar,’ but as the ‘rise of a multi-currency order.’ For India, the path forward involves a ‘cautious-active’ stance—strengthening the macro-fundamentals of the Rupee while maintaining a robust strategic partnership with the U.S. By championing Digital Public Infrastructure (DPI) as a global settlement alternative, India can lead a transition toward a more resilient and equitable global financial architecture that is less susceptible to the domestic policies of a single nation.”