RBI want a hedge against Dollar Reliance, but not push for De-dollarisation

Reserve Bank of India (RBI) Governor said that India is not pursuing “de-dollarisation”, and that recent measures promoting transactions in domestic currencies are intended to de-risk Indian trade.

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Context

The Reserve Bank of India (RBI) Governor said that India is not pursuing “de-dollarisation”, and that recent measures promoting transactions in domestic currencies are intended to de-risk Indian trade.
The clarification came days after US President-elect Donald Trump threatened “100 per cent tariffs” against BRICS countries if they sought to reduce reliance on the US dollar in international trade.

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RBI decisions such as allowing Vostro accounts and entering local currency trade agreements are aimed at diversifying risk rather than reducing dependence on the dollar.
The Reserve Bank of India (RBI) has been buying more gold and moving its gold reserves back to India from abroad.
- This move is partly due to growing global uncertainties, especially after the Ukraine war, and is also a response to fears of facing secondary sanctions.

Facts

Vostro Accounts: A Vostro account is an account held by a foreign bank with a domestic bank in the domestic bank’s currency.
- E.g., a Russian bank holding an account in an Indian bank denominated in rupees would be a Vostro account. This allows for trade settlements in local currencies (e.g., rupees and rubles) rather than having to rely on the U.S. dollar.
Local Currency Trade Agreements:These agreements allow two countries to trade using their own currencies instead of using the dollar as an intermediary.
- E.g., if India enters a trade agreement with the UAE, transactions could be settled in rupees and dirhams directly.

Why is India not supporting de-dollarization?

The growing use of the Chinese yuan as an alternative to the US dollar.
- India has chosen not to use the yuan for buying Russian oil, even though Russia is increasingly accepting the yuan due to Western sanctions.
India is concerned about becoming too reliant on the US dollar, prompting it to take precautionary steps.

Fact

After the West froze $300 billion of Russian foreign reserves, the yuan became the most traded currency in Russia last year.

Global Trends in Gold Purchases

Record Purchases by Central Banks: Central banks bought 1,136 tonnes of gold in 2022 (highest annual demand on record) and 1,037 tonnes in 2023.
- The World Gold Council reported 60 tonnes of net gold purchases in October 2024:
  - RBI added 27 tonnes.
  - Turkey and Poland added 17 tonnes and 8 tonnes, respectively.
China’s Leadership in Gold Purchases: The People’s Bank of China has been the largest buyer of gold in the past two years.
- China’s gold buying supports sanctions-hit Russia and aligns with its trade war with the US.
Impact of Increased Gold Holdings: Central banks reduce the need for US dollar reserves, freeing capital for growth projects.
- The IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) data shows a gradual decline in the dollar’s share in global reserves, with gains in the yuan accounting for a quarter of the dollar’s decline.

Challenges of Dollar Dominance in India’s Neighborhood

Regional Economic Strain: Countries like Sri Lanka, Bangladesh, Nepal, and Pakistan experienced sharp declines in dollar reserves following the Ukraine war, causing trade disruptions and social unrest.
India’s Dollar Concerns: Surging oil prices and the dollar’s high value have raised costs for India.
- Although India has robust dollar reserves, it aims to reduce reliance through domestic currency trade.

India’s Push for Domestic Currency Trade

Initiatives:

Trade in Domestic Currencies: India is encouraging trade with Russia and the UAE in local currencies to reduce dependence on the US dollar.
Internationalization of the Rupee: A potential boost could come if oil exporters begin accepting rupee payments.