Unveiling the Potential: A Closer Look at De-Dollarization and Currency Swaps

A Currency that is widely accepted as a means of payment across numerous nations is known as an international currency. The US dollar has long been considered the dominant currency for international trade and financial transactions, accounting for around two-third of global transactions. However, in recent years, Indian Rupee has been gaining ground as an international currency, leading some analysts to suggest that it could soon be a major challenger to the US dollar’s dominant position as the world’s primary reserve currency.

India has long been making efforts to make Rupee a global reserve currency. The Reserve Bank of India has been implementing measures to make it easier to use Rupee as an international currency, such as introducing the Liberalised Remittance Scheme (LRS), which allows Indian citizens to remit up to $250,000 abroad for various purposes. Furthermore, the RBI has signed bilateral currency swap agreements with a number of central banks, which allow the banks to borrow each other’s currencies in times of financial stress.

Also, the process of Special Rupee Vostro Accounts (SRVAs) started last year in the month of July when the RBI issued detailed guidelines on cross-border trade transactions in Indian rupee (INR). This was in line with RBI’s initiative to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR. To settle trade as per the new mechanism, authorised banks in India need to open and maintain SRVAs of the partner trading country’s banks.

These accounts keep the foreign entity’s holding in the Indian bank in INR. When an Indian importer makes a payment to a foreign trader in Rupees, the amount gets credited to this vostro account. Similarly, when an Indian exporter has to be paid for goods and services in rupees, the amount from this vostro account will be deducted and credited to the exporter’s regular account. The SRVAs holders are allowed to invest surplus balance in Indian government securities. This facility is being provided by the RBI to help popularise the new arrangement. Leading banks of Russia – Sberbank, VTB Bank and Gazprombank were among the first to be granted approval by the RBI for SRVAs.

Recently, the Commerce Secretary, Sunil Barthwal said that India is ready to trade in Indian Rupee with countries which are "facing currency failure or have dollar shortage". Also, discussing the Foreign Trade Policy (FTP) 2023 which seeks to increase India’s exports to USD 2 trillion by 2030, the Secretary on Friday said that the government is focusing on strengthening the Rupee payment system. As of now, 18 countries including Russia, United Kingdom and Germany among others, have already agreed to trade in Indian currency and to make the process smooth, the RBI has given approval for opening 60 special rupee vostro accounts in these 18 countries.

One of the primary reasons for the increasing use of Rupee in international transactions is the growing economic power of India. Over the past 2 decades, India has emerged as one of the world’s fastest growing economies, with average growth rates of 6-7% per year. Furthermore, with a population of over 1.3 billion people, India is home to a huge market of consumers and producers, which has made it an increasingly attractive market for international trade. As India’s economy continues to grow, so does the demand for Rupee. This is evident from the Society for Worldwide Interbank Financial Telecommunication’s data as per which Rupee’s share in global payments has increased from 0.81% to 1.18% between 2015 and 2020.

India is already a dominant regional power in South Asia majorly because of its economic and military strength and this is likely to be reflected in the country’s currency as well. Moreover, India’s strategic partnerships with countries like Russia and USA have facilitated the use of Rupee in international transactions. Furthermore, the use of Rupee in international transactions has been facilitated by the inclusion of Indian companies in major global indices such as MFCI and FTSE. This has made it easier for foreign investors to buy and sell Indian securities without having to convert their currencies into US dollars.

The Growth of Digital Transactions worldwide has also contributed to the increasing use of Rupee as an International Currency. Digital transactions make it easier to use the Rupee for cross-border payments, as they eliminate the need for physical currency and can be processed more quickly and cheaply. For example, the Unified Payments Interface (UPI) has enabled cross-border payments in the Indian Rupee, further increasing the currency’s appeal for international transactions.

Though the US dollar continues to hold dominance as the world's primary reserve currency, the Indian Rupee is emerging as a major contender to it. India’s regional influence, strategic partnerships and regulatory developments are helping Rupee’s demand grow by leaps and bounds. Also, other than the 18 countries which have agreed to deal in INR, India is in talks with many more nations in this regard. As India continues to grow and play an important role in the digital economy, acceptance of the Rupee as an international currency is likely to continue increasing.

Authors: Rajat Sharma, Souptiki Nandi, Durva Jangra

Illustrators: Ujjwal Bhuvnesh, Sehej Negi