Why Dollar Is Losing Steam: Should India Look For Alternative Currencies For Trade Financing? – Analysis


A new dynamism in currency dominance in the global market is taking shape, with the US dollar losing pre-eminence and the Chinese yuan gaining steam. According to an IMF survey, dollar share in central bank foreign exchange reserves declined from 71 percent in 1999 to 59 percent in 2021. This resulted in a steady decline in the use of the US dollar in global trade, according to Mr. Fareed Zakaria, a foreign affairs columnist in an article in the Washington Post. 

The major allegation against the dollar losing steam is dollar-weaponization. The US dollar has been increasingly used as in economic sanctions against non-USA allies rather than facilitating trade financing. According to Ruchir Sharma, Head of Rockefeller Capital Management International, “30 percent of all countries now face sanctions from USA , EU, Japan and UK – up from 10 percent in the early 1990’s.” This led a number of countries to adopted for de-dollarization to rein in dollar volatility. 

China has been viewed as in the lead for de-dollarization. Since 2011, China has gradually shifted to the yuan from US dollar in trade financing and in 2018, it started buying oil in yuan. As a matter of fact, the Chinese yuan is emerging a major challenge to the US dollar. By the end of 2020, the Chinese yuan emerged as the largest component of non-traditional currency in the global reserves (such as Australian dollar, Canadian dollar, Swiss franc and Chinese yuan). This demonstrates that the Chinese yuan is emerging fast as a global currency for trade and paves the way for de-dollarization. In 2016, the Chinese yuan became the first emerging market currency to be included in IMF Special Drawing Rights (SDR) . Prior to that, only the Big Four had the privilege to be included in the SDR. 

In 2022, Turkey and Russia agreed to use the Russian rouble in trade for natural gas. In 2022, Russian President Putin signed an order, desisting ‘non-friendly’ countries (like USA, EU, Japan), from buying Russian gas in any other currency other than the Russian rouble, as a retaliation against USA sanctions on Russia. In January 2023, Saudi Arabia’s Finance Minister Mohammed AI–Jadaan said that his country was open to trade in other currencies, besides the US dollar. 

The momentum behind the growth in de-dollarization was spearheaded by a surge in rouble–yuan trade, owing to the Ukraine invasion. According to Reuters, “Rouble-yuan trade increased eight fold from February to October 2022.”

India is not left behind in the de-dollarization rally. The single biggest item of import of India, which is traded in US dollars, is crude oil. India is the third biggest importer of crude oil in the world. Oil accounts for nearly one third of total imports of India. Given the burgeoning US sanctions and OPEC’s manoeuvring oil prices, India followed the global movement for de-dollarization. As such, it largely diversified the import of crude oil from Russia, based on the terms of non-dollar payment.

Resultantly, Russia emerged as the second biggest supplier of crude oil to India. In the first ten months of 2022-23 (April-January), the import of crude oil from Russia increased to 20 percent of total imports, as compared to 2 percent in the corresponding period last year. Most of the oil imports from Russia were paid in non-dollar currencies, which included United Arab Emirates dirham and rouble, according to Reuters. 

To tide over the US sanctions, India and Russia set up alternative arrangements. Indian refineries have accepted Russian insurance. Russian oil suppliers are trying to handle Urals oil transport to India themselves, using their own vessels and shipping arrangements. Further, the Indian government has permitted nine Indian banks to open vostro accounts with Russian banks. This will facilitate dealing with Russian oil in rupee trade via currency swapping deals. Indian UCO bank has opened the vostro accounts with Russian Gazprombank and VTB banks. 

Furthering the de-dollarization movement, RBI  introduced   additional convertibility of Indian rupee from July in 2022 for trade financing. It allowed invoicing and payment of international trade in Indian rupee under “International settlement in Indian rupees’. RBI allowed 18 countries to transact trade in Rupees. 

According to Finance Minister Nirmala Sitharaman in a Republic TV conclave, RBI initiated this measure to rein in rupee susceptibility to the dollar and euro – the two major currencies dealing with Indian exports and imports – and settle the rupee with non-dollar currencies, which are more stable. This will shield Indian exporters from currency risks and ensure to offer stable export prices to the importing countries. Eventually, this will act could boost exports of the country.

The latest Economic Survey was upbeat to promote international trade in domestic currency. It envisaged that it will protect rupee from volatility and reduce the cost of business in global markets. The survey advocated that it could help Indian exporters in getting advance payment in rupees from overseas clients.  

In summing up, the de-dollarization movement will pave the way for rupee convertibility. This will aid rupee stability, which will ultimately help to boost exports. 

Subrata Majumder

Subrata Majumder is a former adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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