De-Dollarization
Author: Tushit Kapur, Member DelTech MUN & DebSoc Delhi Technological University (formerly DCE).
The United States dollar has been the world’s primary reserve currency since the Second World War. Under the Bretton Woods system, the dollar was pegged to gold and most other currencies were pegged to the dollar. As a result, the dollar was used as the main reserve currency.
The RBI has allowed International trade settlement in Indian Rupees. To accept payments in rupees, authorised dealer banks will have to open special Vostro accounts. The RBI has approved 60 vostro accounts for rupee trade in 18 countries like Russia, Singapore and Sri Lanka.
A vostro account is an account that domestic banks hold for foreign banks in the former’s domestic currency (in this case, rupee). Domestic importers are required to make payment (in INR) into the Special Rupee Vostro Accounts (SRVA) account of the corresponding bank against the invoices for supply of goods or service from the overseas seller/supplier. Similarly, Domestic exporters are to be paid the export proceeds (in INR) from the balances in the designated account of the corresponding bank of the partner country.
1. Reduced demand for forex: The framework would largely reduce the net demand for foreign exchange for the settlement of current account related trade flows it will further arrest the fall of rupee as demand for forex reduces.
2. Reduced vulnerability to external shocks: Reduced dependence on foreign currencies, would make the country less vulnerable to external shocks.
3. Rupee as international currency
4. Trade with sanctioned countries: Circumventing SWIFT payments system and paying for imports in rupees would also help India work around the sanctions imposed on its trade partners.
Complications:
1) RBI’s report warns that the ‘internationalisation’ of the rupee can potentially limit the ability of the central bank to control domestic money supply and influence interest rates as per the domestic macroeconomic conditions.
2) The central bank’s deputy governor, T. Rabi Sankar, had said in October last year that these risks associated with the ‘internationalisation’ of the rupee are unavoidable if India wants to become an economic power. “If a substantial portion of its trade is in rupee, non-residents would hold rupee balances in India which would be used to acquire Indian assets. Large holdings of such financial assets could heighten vulnerability to external shocks, managing which would necessitate more effective policy tools,” he had said.
3) Although from an Indian standpoint, the idea is not to challenge dollar dominance, however, the effort might indirectly affect the services sector for which we are dependent on the developed markets like the US and Europe.
4) For now, India’s share in global trade is not significant enough and we are overwhelmingly dependent on the import of fossil fuels, edible oils, gold, silver, etc. making it an unlikely possibility for exporting countries to consider the Indian rupee as an invoicing currency, unless it suits their interests.
5) The simultaneous pursuit of the exchange rate stability and a domestically oriented monetary policy will be more challenging, “unless supported by large and deep domestic financial markets that could effectively absorb external shocks”.
NOTE: The views expressed in the above mentioned article by the author are drawn from open sources. There is no intent to hurt someone’s sentiment or values.