Reserve Bank of India (RBI) Governor Shaktikanta Das said on Friday (Dec 6) that India is not pursuing “dollarization” and that recent measures to promote transactions in domestic currencies are aimed at de-risking Indian business.
The clarification comes after US President-elect Donald Trump threatened to impose “100 per cent tariffs” against the BRICS countries if they try to reduce their reliance on the US dollar in international trade.
Das said that BRICS (Brazil, Russia, India, China, South Africa) nations have discussed the possibility of a common currency but have not reached a decision. RBI decisions such as allowing vostro accounts and entering into local currency trading agreements are aimed at diversifying risk rather than reducing dependence on the dollar.
“It’s not about de-dollarisation; it’s about de-risking our trade,” Das said. “The geographical expansion of the BRICS nations is a factor to consider. Unlike the Eurozone, whose geographical contiguity enables a single currency, the BRICS countries are spread across different regions, posing unique challenges,” he said.
The main reason why India does not support de-dollarization is the rise of the Chinese yuan, which challenges the US dollar. India has resisted using the yuan for Russian oil imports, even as the currency is increasingly accepted in Russia. The yuan became Russia’s most traded currency last year, following Western sanctions on Russia, including a $300 billion freeze on Russian foreign holdings.
At the same time, India is wary of over-reliance on the dollar. RBI has increased gold purchases and has started repatriating gold held abroad.
This is partly due to heightened uncertainty following the Ukraine war, consistent with global central banks buying gold for fear of secondary sanctions.
Why are central banks in a rush to buy gold?
Central banks, especially in emerging market economies, have sharply increased their gold holdings to move away from a dollar-dominated financial system.
Central banks collectively bought a net 1,136 tonnes of gold in 2022, the highest annual demand on record, and another 1,037 tonnes in 2023, according to JP Morgan.
The World Gold Council, the London-headquartered international trade association for the gold industry, said last week that central banks reported buying 60 tonnes of pure gold in October. “The Reserve Bank of India (RBI) led the region, adding 27 tonnes of gold to its reserves, followed by Turkey and Poland – 17 tonnes and 8 tonnes respectively,” the council said.
In particular, China has bought record amounts of gold over the past two years, meeting much of the demand stemming from sanctions-hit Russia and embroiled in a trade war with the US. In 2023, the People’s Bank of China bought more gold than any other central bank.
The currency composition of the International Monetary Fund’s (IMF) Official Foreign Exchange Reserves (COFER) shows a gradual decline in the dollar’s share of central bank and government foreign reserves. The yuan’s gains, in particular, “corresponded to a quarter of the decline in the dollar’s share”, the IMF said.
A JP Morgan report said an increase in gold purchases by central banks reduced the need for careful storage of US dollars and US Treasuries, freeing up capital for growth-enhancing projects.
How does the high cost of holding dollars play into this scenario?
Dwindling dollar reserves amid rising oil prices have recently caused major social and political unrest in India’s neighbourhood. The dollar reserves of Sri Lanka, Bangladesh, Nepal and Pakistan have fallen sharply since the Ukraine war, which has worsened trade relations with India. Although India has managed to maintain strong reserves, the rising value of the dollar has become a concern.
To partially de-risk its trade relations, India is pushing to trade with Russia and the UAE in domestic currencies that could help reduce dependence on the US dollar. However, due to India’s low presence in international trade in goods and services, domestic currency trade has not picked up pace as expected.
India’s efforts to internationalize the rupee could get a boost if oil exporters start accepting rupee payments. However, they are confused because the transaction is expensive.
One reason for the rise in the value of the yuan is its use in buying Russian oil. Due to the bilateral trade balance between China and Russia, both countries have been able to successfully trade in domestic currencies and reduce their dependence on the US dollar. India has a bilateral trade deficit with most countries except the US.