• Any volatile changes in the exchange rate between countries’ domestic currencies may have wide implications on their interest rates, forex as well as trade.
• To shield economies from such exchange rate volatility, many countries have been looking to De-dollarise their trade and for currency diversification.
• The US has shut Russia out of the SWIFT (Society for Worldwide Interbank Financial Telecommunication, 2013) system and freezed its dollar assets in US banks as part of the sanctions.
• This has led many economies to rethink about de-dollarisation in order to avoid such conditions happening to them in future.
• US Legislation such as the International Emergency Economic Powers Act, the Trading With the Enemy Act and the Patriot Act, allows US to weaponize payment flows and use dollar for their political leverage and motives.

Dominance of the US Dollar:

• US Dollar has a safe value and an almost global acceptance, which make it accounts for about 90% of all foreign exchange transactions.
• 50% of all global trade invoicing are done in US dollar.
• This is despite the US accounting for just 12% of the global trade.
• US Dollar comprises of 60% of foreign exchange reserves worldwide.
• The increasing dependency on the dollar exposes countries to risks from US international politics and sanctions.

Condition of other currencies in International Trade:

• As per the SWIFT, the use of local currencies in international payments has increased between 2013 to 2019.
• The Triennial Bank Survey of 2022 of the Bank of International Settlements (BIS) suggested that while the percentage share of dollars in daily turnover has increased from 2013 to 2022, the share of non-dollar-denominated trade from emerging economies is also increasing.
• In 2022, the Chinese renminbi became the fifth most traded currency in the world, accounting for about 7% of global foreign exchange trading.
• Over 70% of the China-Russia trade was settled in yuan and roubles.
• Alongside local currency usage increase, even local currency bond markets are growing rapidly.
• The Asian Development Bank states that the emerging market local currency bond markets grew, from $17.3 trillion in 2015 to $25.9 trillion in 2021.

De-Dollarisation:

• De-dollarisation can be defined as the process of reducing dominance of dollars in international trade market and increasing strength of local currency.
• The Russia-Ukraine war is considered the beginning of de-dollarisation.

Need for De-Dollarisation:

• To decrease dependence on US Dollar.
• To strengthen local currency for international trade.
• Direct trade in local currency can reduce exchange costs.
• More financial stability and less risk.

Improving rupee’s stand:

• India has always explored the use of rupee through various arrangements such as currency swap and bilateral trade.
• India has established its first International Financial Services Centre (IFSC) in GIFT City, Gujarat in 2015 to promote use of rupee in international financial transactions.
• The government has gradually liberalised India’s capital markets by increasing the availability of rupee-denominated financial instruments, such as bonds and derivatives.
• The government has also undertaken initiatives to promote digital payment systems such as the Unified Payments Interface.
• In 2022, the government has announced International Trade Settlement Mechanism to promote the use of rupee in settling international trade.
• The mechanism involves setting up of Special Vostro Rupee Accounts (SVRAs) by authorised Indian banks and their corresponding banks in partner countries, for settling payments in rupees at market-determined exchange rates.
• The RBI has permitted banks of 18 countries to open such accounts in India for rupee-based trade.
• It is done to lower transaction costs, have greater price transparency, faster settlement time and promotion of overall international trade.
• India has also signed agreements with the UAE for the settlement of cross-border transactions in local currencies and interlinking payment and messaging systems of the two countries.

Drawbacks of rupee based international trade

• 86% of India’s imports is still done in dollar, while only 5% of India’s imports originate in the US, shows that the de-dollarisation effort is not much impactful.
• The partner countries often tend to move away from local currency trade to avoid rupee accumulation as the currency is not convertible.
• Russia has pressurised India to pay for oil imports in renminbi. 

Some experts state that dollar will not be overtaken as the world’s leading reserve currency anytime soon. In addition to accounting for the majority of global reserves, the dollar remains the currency of choice for international trade. Major commodities such as oil are primarily bought and sold using U.S. dollars. Many countries do not have their own currency but use US Dollar as their currency. So, it is simply said than done to curb growth of Dollar from international trade. Foreign Trade Policy 2023 has also suggested increased focus on rupee settlement of India’s trade. India’s ambitious export target of $2 trillion by 2030, up from the present $447 billion, may lend support in improving the rupee’s global standing; full capital account convertibility of the rupee would certainly help, along with higher and sustained economic growth.