The Declining Dollar Reign

By- Pooja Jain

America’s global dominance and increased geopolitical risk are causing a worldwide wave of “de-dollarisation.” This is a critical step towards preventing Western countries from using economic sanctions to further their national agendas and exploit their dominance for personal gain on a global scale. But what is de-dollarisation, and how is India moving about it in tandem with its path to being a developed nation? The dollar’s acceptability as a medium of trade is widespread, and there is a certain sense of psychological bias rooted in the belief that the dollar’s value has a stability component. But where does this bias come from, and if at all, is it eroding? 

From 1870 to 1914, the gold standard was widely used as a medium of international trade. However, one of the major shortcomings of the said system was that the economies were expanding but gold had an exhaustive availability component to it. Subsequently, the World Wars created distress and to tackle that, the Bretton Woods conference was held in America which led to the establishment of the World Bank, the International Monetary Fund, and the International Trade Organization. One ounce of gold was provided a fixed value of 35 dollars. Globally, the other nations relied on trade mechanisms to determine their value with respect to the dollar. 

With Europe’s trade power dwindling as a result of widespread industrial devastation, America elevated to global prominence. Europe started relying on America for weapons and industrial goods, leading to a boom in the American economy and its share in global trade. The need to buy goods from America gave a rise to the demand for dollars.

Exponential demand for dollars led to a rise in the value of the dollar with respect to other currencies. The value of the dollar further rose when America fixed the value of oil in an agreement with Saudi Arabia in dollars. Gradually, controversies arose revolving around the dollar-centric global trade scenario, and the most prominent of those was Triffin’s Dilemma. It stated that if America failed to meet its short-term obligation in catering to international reserves, it could result in a shortage of liquidity that could put the entire world economy in a contradictory spiral.

This led to the introduction of Special Drawing Rights (SDR), the value of which was fixed at 1 SDR = $1. The SDR was further integrated with a basket of currencies, including those of the member countries of the IMF.

The American government, however, saw this as a mechanism to weaponize their trade, impose sanctions and manipulate entry into SWIFT (Society for World Interbank Financial Telecommunication). Under Joe Biden’s administration, the SWIFT network and the dollar exchange system were positively manipulated to impose sanctions on Russia. One major implication of this manipulation was that the Asian countries were forced to comply with America’s political say in order to not lose out on trade because of the absence of an alternative payment system. Now, as a result of the dollar’s sheer strength and unethical manipulation for personal gain, nations are beginning to chip away from its hegemony in order to prevent the dollar from becoming an overt political tool.

Major moves globally to circumvent dollar centralisation as a preventive measure and to strengthen their core economic system are-

  • Since 2011, China has been gradually shifting away from the USD to the Yuan. It has made agreements with Russia, Australia, Japan, Brazil, and Iran to trade in international currencies. In the 2022 GCC Summit, China came to an agreement with the UAE to further trade in oil. Their strategy, mostly centered as retaliation to the US’ motive to choke China, is to dump US treasuries while buying massive amounts of gold. The People’s Bank of China also submitted a “Global Sovereign Digital Currency Governance” proposal to the Bank of International Settlements to influence global financial rules via e-yuan. This initiative will collaborate with other digital currencies, while the national equivalent being the digitalisation of the Indian currency, the e-rupee.
  • Russia has been on a prolonged de-dollarisation effort since 2014 when economic sanctions were imposed on it after the annexation of Crimea. Iran and Russia entered into a bilateral trade agreement in 2021 to reduce their dependence on the dollar. This new system would ostensibly provide debt relief in the respective countries. Russia’s share of dollar-dominated assets came down to about 16% by 2021 because of the prioritisation of bilateral trade over trade in USD. 

While the global front continues to struggle with uncertainties on economic, geopolitical, and climatic fronts, India’s external sector has continued to show remarkable progress. India is integrated with the global economy and has emerged as one of the fastest-growing economies and a preferred location for international investments. Our foreign exchange reserves, as a result, continue to grow, playing a critical role in cushioning the severe economic impact of the global turmoil and strengthening the macroeconomic fundamentals of the economy.

The internationalisation of the rupee, based on these powerful macroeconomic cores, provided a base for the nation to establish a global presence and move with the global wave of declining dollar power.

But what is an international currency? 

An international currency is a freely available medium of exchange for non-residents and residents to settle cross-border transactions. All major international currencies only pertain to the most powerful countries because of requisite preconditions like global GDP, globally dominant businesses and extraordinary military capabilities.

In such a scenario, why is India making a move that it is not entirely capable of?

It must be noted here that India is not proposing the ‘rupee as an international currency’. It is on a path to make tangible progress towards the ‘internationalisation of the rupee’. 

Is the internationalisation of the rupee a desirable objective with respect to public policy and international relations?

Using the rupee for cross-border transactions will not only mitigate financial risks for businesses pertaining to uncertain geopolitical fluctuations but also substantially reduce their costs and provide a better growth prospect, both domestically and internationally.

Internationalisation of the rupee will also negate the need for holding large forex reserves as the need for forex to make international remittances and trade will go down. While reserves help manage exchange rate volatility and external stability, they impose a cost on the economy. For example, there is a general agreement that India’s reserves are borrowed funds. Banks and corporations incur external debt at market rates which are then invested in government securities issued by advanced economies. The rate at which external debt is incurred is substantially higher than the return on reserves. Therefore, reducing the requirement for reserves will help reduce some of this loss of income. 

As the use of the rupee increases, India will become more resilient to external shocks and Indian businesses will improve, adding weight to the Indian economy and enhancing India’s global stature and respect.

How are we going about it?

As an initial step, India began enabling external borrowing in rupees. The RBI’s July 2022 scheme, which allows for rupee settlement of external trade, established a more comprehensive framework including the ability to invest surplus rupees in Indian bond markets. India is receiving an increasing response from its trade allies to participate in the rupee trade. It has been in talks with and has started opening Vostro accounts for nations like Russia, Mauritius, the UAE, Saudi Arabia, Tajikistan, Cuba, Luxembourg, and Sudan. The government is planning to prospectively invite nations that are short of dollar reserves to further pursue mutual interests.

The risks to the internationalisation of the rupee are real and avoidable as a decelerating force in India’s progress to become a superpower. India is an emerging but capital-deficient nation. Depleting foreign exchange reserves might reduce the growth rate because of the reduced ability of foreign capital to fund itself. Non-resident holdings of the rupee as a primary medium of exchange could exacerbate external stimulus to domestic financial markets which would in turn increase volatility. Adequate macroeconomic policies would be needed to measure such risks. Internationalisation makes domestic monetary policy more challenging. However, the alternative of compromising exponential growth by playing it safe is not an optimal choice. The government needs to calibrate its moves to the evolving needs of the nation, particularly the economy, and the size of the external sector. The implementation of these measures will undoubtedly take time but the significant benefits of catering to India’s prominence in global trade will be a critical step towards the declining dollar reign.


  1. Wikipedia contributors. (2022, December 28). Dedollarisation. Wikipedia. 
  2. Internationalisation of Rupee. (2022, October 20). 
  3. ENS Economic Bureau. (2022, October 23). Internationalisation of rupee has risks but they are unavoidable: RBI deputy governor. The Indian Express.