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Is India Alleviating DeDollarization?

Is India Alleviating DeDollarization?

By Awais Abbasi

India's pursuit of dedollarization is a complex and gradual process that 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.

India is emerging as a key player in the global dedollarization trend by diversifying its currency and exploring alternative financial systems to increase its economic autonomy. Recently, India 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 is also exploring an alternative to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) with Russia and China. 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. This interest is driven by India's 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.

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.

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.

The US dollar's privileged status as the world's primary reserve currency has allowed the US to enjoy many advantages, including lower borrowing costs, large trade deficits, and significant global influence. For instance, countries hold US dollars as reserves to pay for their imports, pay off debts, and stabilize their currencies. The US can borrow money more cheaply than other countries because of its currency's reserve status. Additionally, the US can run large trade deficits, as other countries accept its currency as payment for their exports, and the US can print more dollars to pay for imports. Furthermore, the US dollar's status as the global reserve currency gives the US significant geopolitical power, as it can use economic sanctions to exert pressure on other countries.

However, if other currencies displace the US dollar as a store of value and medium of exchange, the US could face several significant economic and geopolitical challenges. For example, the US could face higher borrowing costs if it loses its reserve currency status, as investors may demand higher interest rates to hold US debt. This could lead to higher costs for the US government and consumers, negatively impacting the US economy's growth and stability.

Moreover, the US could face reduced demand for its assets if other countries and investors begin to shift away from the dollar. This could lead to a devaluation of the US dollar, leading to higher inflation and making imports more expensive for US consumers.

Furthermore, the US dollar's role as a safe-haven asset and global liquidity provider could also be threatened if other currencies emerge as alternatives. In times of crisis, investors typically seek refuge in US dollars, as it is seen as a safe investment. If other currencies become more attractive, investors may withdraw from US markets, causing instability.

About the AuthorAAaaBottom of Form

 

The author is a graduate of International Relations and an Independent researcher besides working as visiting faculty at University of South Asia.

 

*Opinions expressed in this article are the writer's own and do not necessarily reflect the editorial policy of The South Asia Times  

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