[MA XUEJING/CHINA DAILY]
by Aiman Khan 30 April 2023
The dedollarization trend is gaining traction globally, and India is emerging as a key player in this movement by diversifying its currency and exploring alternative financial systems to increase its economic autonomy.
India has recently announced a new foreign trade policy allowing the use of the rupee in trade with countries facing dollar shortages or currency crises, and Malaysia has become the latest country to join this scheme. The Reserve Bank of India (RBI) had already decided in July 2022 to settle international trade in rupees, aiming to support traders using the currency and boost global trade. India has already been trading in rupees with several countries, including Russia, Mauritius, Iran, and Sri Lanka.
Moreover, India is also exploring an alternative to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) with Russia and China, which could enable India to trade with countries under US sanctions using their own currencies. The plan is to link India’s domestic financial messaging system with Russia’s SPFS and China’s CIPS, indicating India’s growing interest in promoting alternative financial systems.
India’s interest in exploring an alternative to SWIFT with Russia and China can be traced back to the sanctions imposed on Iran by the US and its allies. These sanctions have severely restricted Iran’s ability to use the global financial system for trade and investment, as most banks are wary of transacting with the country due to the risk of being penalized by the US.
A number of countries are actively pursuing dedollarization, including China, Russia, Brazil, India, ASEAN nations, Kenya, Saudi Arabia, and the UAE. India, traditionally a close ally of the US, has joined forces with China to promote the use of its own currency, the rupee, as an alternative to the dollar in global trade.
Moreover, Iran and its trading partners, including Russia and China, have been working on developing alternative payment systems that bypass SWIFT and allow transactions to be settled in their own currencies. Russia’s SPFS and China’s CIPS are two such systems that have been developed as alternatives to SWIFT.
India’s interest in these systems is driven by its desire to reduce its dependence on the US dollar and avoid the risk of being cut off from the global financial system in the event of US sanctions. By linking its own domestic financial messaging system with SPFS and CIPS, India would be able to settle transactions with these countries using their own currencies, even if they are under US sanctions.
Furthermore, India’s interest in dedollarization is also influenced by its growing economic ties with Russia and China. India is one of the largest importers of crude oil from Russia, and the two countries have been working on increasing their bilateral trade in other sectors as well. Similarly, India and China have been expanding their economic cooperation in recent years, with the two countries setting a target of $100 billion in bilateral trade by 2022.
In light of these factors, India is actively seeking to reduce its dependence on the US dollar and explore alternative payment systems by deepening its economic ties with Russia and China. However, it remains to be seen how successful India will be in promoting these alternative systems, given the entrenched dominance of the dollar in the global financial system.
The dedollarization process is a complex and gradual one, and any currency seeking to challenge the dollar’s supremacy will likely face significant obstacles. Currently, the US dollar accounts for a substantial portion of global foreign exchange reserves, and commodities are widely priced and traded in dollars, particularly oil. The US also wields significant influence over global financial institutions and trade.
Nonetheless, the dedollarization trend is accelerating, and it poses significant implications for the US economy. The US dollar’s privileged status as the world’s primary reserve currency has conferred many advantages, such as lower borrowing costs, large trade deficits, and global influence. If other currencies displace the dollar as a store of value and medium of exchange, the US could face higher borrowing costs, reduced demand for its assets, and decreased geopolitical power. The US dollar’s role as a safe haven asset and global liquidity provider could also be threatened if a new reserve currency or multipolar currency world emerged, potentially leading to financial instability.
As more countries shift towards other currencies for commodity transactions, the US could face higher import prices and increased volatility in global commodity markets, potentially harming the US economy’s growth and stability. Therefore, dedollarization is a complex and lengthy process, but the trend is clear and undeniable. The US must prepare for a future in which its currency is no longer the primary choice for global trade and investment.