Reshaping global finance: Unfolding de-dollarization trend and India’s quest for internationalization of Rupee

US dollar’s dominance weakens as countries reduce holdings, favor gold, and explore non-dollar settlements, impacting India’s business landscape.

The dominance of the US dollar is weakening as other currencies gain ground. While still a major reserve currency, its share has dropped to 58% in 2022 from 71% in 2001. Countries are reducing their dollar holdings, favouring alternatives like gold. Central banks bought the most gold since 1950 in 2022. Some nations are exploring non-dollar settlements for trade and investments, reshaping the global order and affecting asset prices. Learn more about the accelerating de-dollarization trend and its implications on India’s business landscape in this week’s cover story.

Countries decreasing their reliance on the dollar

The surge in de-dollarization stems from the US government’s risky monetary policies, capitalizing on its global currency status. Excessive money printing boosted its economy but harmed others, especially emerging markets. The US then hastily tightened monetary policy to curb inflation, causing worldwide disruptions. This stronger dollar worsened global inflation and hurt countries with dollar-denominated debt. Growing use of the dollar for sanctions alienated countries, driving them to reduce reliance on it. This drive for a more stable financial system is nudging the world to lessen dependence on the dollar.

Sakshi Gupta, Principal Economist, HDFC Bank, writes, “The status of the dollar is now being questioned, with last year’s sanctions on Russia by developed nations including the US. The weaponization of the dollar has triggered renewed focus on hunting for alternatives. This motivation also stems from the need to protect against spillover effects created by significant changes in US monetary and fiscal policies.

Over the last three years, in the wake of geopolitical uncertainty, financial markets volatility and pandemic induced disruption, many emerging market central banks have diversified their forex reserves into non-traditional currencies (like AUD and KRW) and gold. The intention is not to replace the dollar completely and for it to lose its reserve currency status but to diverse and find a balance with other currencies and assets.”

Many prominent industry leaders in India are staunchly supportive of the Reserve Bank of India’s (RBI) de-dollarization efforts.

“De-dollarization stands as a pivotal initiative undertaken by the RBI, especially benefiting corporations like ours with a widespread global footprint across economically dominant nations such as the US, Germany, Denmark, and China. Given our extensive imports, predominantly denominated in Euro, US Dollar, and Chinese Yuan, including transactions with both inter-group and external entities, this strategic move bears significant relevance,” says Rohitt Kapur, Chief of Finance, Accounting & Company Secretary, BEUMER group.

Any worthy challengers to fill the void?

Despite a weakening grip on global exchange, predicting the dollar’s demise would be premature. Its advantages, like economic stability, vast size, and convertibility, remain unmatched. While the Chinese Yuan possesses economic power, capital controls hinder its global standing. The Euro’s convertibility is balanced by the EU’s instability. Furthermore, the US flaunts a deep, liquid financial market, reinforcing its status as the world’s reserve currency.

“Gold, despite the global central bank rush to hoard in the last few months, will never become a currency peg again. The Yuan can make a dent as the global currency of transaction but cannot take over the store of value function,” believes Monika Halan, Chairperson of SEBI’s Advisory Committee for Investor Protection and Education Fund.

Moreover, the dollar’s strength comes from its backing by a robust economy and well-managed financial system. Transitioning to alternatives is inconvenient and deters countries due to exchange rate volatility, impacting trade and investment. As long as the US remains a major economy and switching is difficult, the dollar will remain the global reserve currency, as noted by Brad MacMillan, CIO of Commonwealth Financial.

Does Rupee stand a chance?

India is working to elevate the Rupee’s global status. The RBI’s inter-departmental group emphasized the Rupee’s potential as an international currency, citing India’s robust growth and resilience.

Indian business and finance executives hold a strong sense of optimism regarding this matter. During our discussions, one of our member CFOs (who requested to remain anonymous) unveiled a noteworthy insight. According to him, if the Indian Rupee attains international recognition, this move could bestow substantial benefits upon India. This transformative shift has the potential to curtail the cost of conducting global business, encompassing both exports and imports. Presently, the majority of our local entrepreneurs find themselves compelled to hedge against various currencies in which they engage in transactions. However, the emergence of a solitary currency to drive international trade would significantly alleviate the expenses associated with conducting business activities.

Highlighting the advantages of transitioning to Rupee transactions, Rohitt Kapur, Chief of Finance, Accounting & Company Secretary, BEUMER group, says, “Currently, we’re not hedging for transactions with Intergroup companies during imports. But for exports to external group customers, we hedge against USD, which incurs costs due to occasional delays in receivables and the need for hedging reversals. While this balances out on consolidation, it’s effective for standalone hedging when receivables and payables are certain.

Discussions are underway with our group companies to transact in INR. This change can enhance efficiency, bottom-line, and reduce regulatory hassles. Embracing INR transactions aligns with India’s growth story and should be pursued for substantial benefits, without expecting transaction volume reduction.”

Although many maintain a sense of optimism, we cannot disregard the inherent risks associated with internationalizing the Rupee.

“The most significant challenge we will face pertains to the widespread acceptance of the Indian Rupee across diverse international exchanges and its recognition by the corresponding regulatory authorities of various countries. This challenge is particularly noteworthy because India’s historical emphasis has been more on imports rather than exports, resulting in a substantial trade imbalance. Addressing this challenge is crucial as it stands as a potential bottleneck,” believes Dev Tripathy, Director – Finance, Philips.

He also opines that enhancing our domestic manufacturing capabilities will play a pivotal role in the internationalization of the Rupee. “By producing more goods within India, we can stimulate greater acceptance of our currency on the global stage. Conversely, the current situation with Russian imports illustrates a predicament where Russia holds a significant amount of Indian currency without a commensurate opportunity to utilize it for imports. This scenario underscores both a challenge and an opportunity,” says Tripathy.

We can only hope that the Rupee will progressively gain global recognition through sustained strategic measures and judicious policies. As Sakshi writes, “Successful internationalization requires a careful balance between liberalization, economic stability, and regulatory oversight.”

Written by Shivani Srivastava, Senior Editor, CFO Collective