The change in global financial dynamics is reflected in U.S. President-elect Donald Trump’s warning to BRICS countries (Brazil, Russia, India, China and South Africa) about attempts of de dollarization. Among the BRICS countries, India is a rising economic force that is important to the overall picture. Let us now find out what reserve currency means, what dollar’s role is, de-dollarization implications, and where India stands in the debate.
What Is a Reserve Currency and Why Is the Dollar Dominant?
Reserve currency is that currency, which countries and institutions hold for international trade settlement and debt liquidation purposes and also to stabilize their currency. The dollar dominates the pool of reserve currencies in circulation mainly because
- Economic and Military Power: The United States’ status as the global superpower lends confidence in its currency.
- The Petrodollar System: Oil and other strategic commodities are sold in dollars, hence its central position in international trade.
- Stability and Trust: The US Federal Reserve is considered to be a stable and trustworthy system.
How the U.S. Weaponizes the Dollar
The dollar has long been a tool used by the US to enforce sanctions and influence events around the world. Due to their inability to access dollar-based systems, countries like Venezuela, Russia, and Iran have become economically isolated and have been forced to look for alternative currencies. Dollarization is both a source of U.S. power and a source of resistance among countries.
What is de-dollarisation?
De-dollarisation refers to the process by which countries reduce their reliance on the US dollar as a medium of exchange, reserve currency, or standard for international trade. It involves shifting away from the dollar in favour of other currencies or alternative systems, such as national and regional currencies, or even digital currencies like cryptocurrencies.
What Is BRICS?
BRICS is an acronym for the grouping of the world’s leading emerging economies, namely Brazil, Russia, India, China and South Africa. The BRICS Leaders’ Summit is convened annually. In the Johannesburg Summit 2023, Brazilian President Lula De Silva sought to reduce dependence on the dollar system. The group, in the process of de-dollarization, seeks to limit reliance on the dollar by
- More trade in local currencies, for example between India and Russia.
- Exploring a shared BRICS currency to facilitate trade.
- Promote alternative financial systems and reduce exposure to U.S.-dominated institutions like the IMF and World Bank.
India’s Stand on the Dollar and De-Dollarization
India’s stance is pragmatic, a reflection of its dual position as a major trading country and a member of the BRICS group. Being somewhat cautious about supporting a common BRICS currency, it remains active in the concept of trade in local currencies as well as a multipolar financial structure. Key elements of India’s approach involve:
Facilitating Rupee Trade: India has already signed agreements with Russia and Sri Lanka among others, to settle trade in rupees to come out of the dollar trap.
Balancing Alliances: India balances all this by maintaining strong economic relations with the U.S. and Europe, not confronting the dollar system in an overt manner.
Volatility risks: The diversification of trade currencies will help India circumvent the volatility risks of global markets given the rise in dollar fluctuations.
India’s approach has been to balance the commitment of BRICS with its aspiration for global financial integration.
The Impact of De-Dollarization on India
By de-dollarizing its economy, the risks and opportunities for India are enormous.
- Reduced Trade Deficits: Trading in rupees can reduce the import cost, particularly that of oil, which India depends majorly on.
- Economic Stability: The diversification reduces exposure to dollar-driven fluctuations that can often stabilize inflation and the rupee value.
- Challenges of Transition: A country-wide shift away from the dollar could increase the cost and complexity of transactions in the near term.
The Potential Tariff Fallout
President-elect Trump’s statement that tariffs may be levied upon BRICS nations if they don’t cease challenging the dollar basis raises the prospect of economic retaliation. For India:
- Higher Export Costs: Tariffs on Indian goods could hurt key sectors like textiles, pharmaceuticals, and IT.
- Trade Diversification: India may expand trade relations with non-Western countries to balance the U.S. pressure. President-elect
The Cost of a Strong Dollar
A strong dollar benefits American consumers by making imports cheaper but is costly. It makes U.S. exports more expensive, hurting industries reliant on sales abroad and threatening job losses. Currency manipulation adds to the problem. Countries such as China have historically kept their currencies undervalued to boost exports, thereby making U.S. goods less competitive abroad.
For India, the strong dollar has been a double-edged sword:
Increased Import Costs: A strong dollar makes oil and other imports expensive and contributes to worsened trade deficits.
Export Competitiveness: Indian goods become more attractive when the dollar is strong against the rupee.
De-dollarization might provide India with a means of balancing this while simultaneously promoting a more balanced trade environment.
India’s position in the debate regarding de-dollarization is pragmatic. Though India is supportive of BRICS’s initiatives to diversify international trade currencies while still retaining economic benefits from the system through dollar-driven engagements. And as BRICS accelerates its plans for a global financial reform, India will maintain walking on the thin rope-the balance between its sound financial stability and the advocacy for multipolar financial order. The warnings by Trump reflect the tensions this shift creates, emphasizing the importance of collaboration and prudent policymaking in navigating these often uncharted waters.
