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

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.

More in News

  • 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.

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