Syllabus: Effect of policies and politics of developed and developing countries on India’s interests
What is De-dollarisation?
- De-dollarisation refers to reducing reliance on the US dollar in global trade, reserves, and finance.
- It seeks to reverse historical dollarisation, where the dollar dominated international monetary systems.
Key Reasons Driving De-dollarisation
- Mismatch between US economic weight and dollar dominance, despite US GDP share declining significantly.
- Eroding confidence in the dollar due to rising US public debt and fiscal uncertainties.
- Spillover impacts of US monetary tightening, causing inflation, currency depreciation, and debt stress elsewhere.
- Weaponisation of the dollar through sanctions, affecting nearly 40 countries and policy autonomy.
- Push for a multipolar global order, reflecting aspirations for a fairer New International Economic Order.
- Strengthening alternatives, including reforms and stability in economies like China, improving currency credibility.
Recent Global Trends in De-dollarisation
- Central bank forex reserves show the dollar’s share declining to a two-decade low.
- US Treasury market witnesses falling foreign ownership, indicating reduced fixed-income dependence.
- Commodity markets increasingly price energy and raw materials in non-dollar contracts.
Major Initiatives Supporting De-dollarisation
- mBridge Project enables cross-border CBDC payments, backed by China, Thailand, and others.
- BRICS Pay promotes faster, cheaper cross-border trade using local currencies.
- China’s Digital Yuan (e-CNY) pushes global usage via digital settlements and yuan-backed stablecoins.
- Pan-African Payment and Settlement System (PAPSS) facilitates African trade in local currencies, bypassing the dollar.
- Russia’s SPFS ensures secure financial messaging independent of Western-dominated systems.
Challenges Associated with De-dollarisation
- High transition costs, including system upgrades, contract revisions, and trade renegotiations.
- Market volatility risks, as currency shifts generate uncertainty in global finance.
- Geopolitical frictions, with de-dollarisation perceived as challenging US economic influence.
- Reserve diversification risks, involving exposure to currency instability or commodity price fluctuations.
Conclusion
- De-dollarisation reflects gradual systemic rebalancing, not immediate dollar displacement.
- For India, de-dollarisation aligns with rupee internationalisation, enhancing monetary autonomy.