The US dollar has long been a dominant currency, representing a safe value and an almost global acceptance. It accounts for about 90 per cent of all foreign exchange transactions, 50 per cent of all global trade invoicing (despite the US accounting for just 12 per cent of the global trade) and comprises 60 per cent of foreign exchange reserves worldwide.

It is often felt, more than before, that the increasing dependency on the dollar exposes countries to risks from US international politics and sanctions. To put it more simply, any movement in the exchange rate between countries’ domestic currencies and the dollar typically has wider implications on their interest rates, forex as well as trade. To shield their economies from such exchange rate volatility, many countries have been, of late, looking to de-dollarise their trade and for currency diversification.

As per SWIFT data, the use of local currencies in international payments has increased between 2013 and 2019. The Triennial Bank Survey of 2022 of the Bank of International Settlements (BIS) also suggests that while the percentage share of dollars in daily turnover may have marginally increased from 2013 to 2022 (from 87 per cent to 88.5 per cent), the share of non-dollar-denominated trade from emerging economies is also on the upswing. In 2022, the Chinese renminbi became the fifth most traded currency in the world, accounting for about 7 per cent of global foreign exchange trading. This is evidenced by the fact that over 70 per cent 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 to $25.9 trillion in 2021, from $17.3 trillion in 2015.

However, these data, while talking about increase in local currency usage in trade, do not portend to any diminishing role of the dollar. Welcome gain of the local currency is largely due to their economic growth and faith in their growth story.

Improving rupee standing

The Indian story is in line with emerging economies trend. India has always explored the use of rupee through various arrangements such as currency swap and bilateral trade.

In 2015, India established its first international financial services centre (IFSC) in GIFT City, Gujarat, with the aim of promoting use of rupee in international financial transactions. Over the years, the government has gradually liberalised India’s capital markets — increasing the availability of rupee-denominated financial instruments, such as bonds and derivatives, and also undertaken initiatives to promote use of digital payment systems such as the UPI.

More recently, in 2022, the government 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 from 18 countries to open such accounts in India for rupee trade. The objective is to primarily lower transaction costs, have greater price transparency, faster settlement time and promotion of overall international trade. The mechanism will have salutary impact on remittances that India receives from its large diaspora. Foreign Trade Policy 2023 has also brought increased focus on rupee settlement of India’s trade.

These steps by India are an effort to create the rupee’s own standing and reduce its vulnerability against the dollar and increase India’s resilience in the global trade market. But the fact that 86 per cent of India’s imports is dollar invoiced, while only 5 per cent of India’s imports originate in the US, shows that the de-dollarisation effort is not as impactful. Often, partner countries tend to move away from local currency trade to avoid rupee accumulation as the currency is not convertible. Recent Russian pressure on India to pay for oil imports in renminbi is a pointer to that. Russia has a ballooning rupee reserve of over 40 billion, while they do not have sufficient renminbi to pay for imports from China.

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.

Sanjay is partner, and Vasundhara is Assistant Manager in public policy, Deloitte India. Views are personal