De-dollarisation

Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT

Meaning

De-dollarisation means cutting down how much countries rely on the US dollar in three areas: trade (pricing and paying for goods), reserves (the foreign currency central banks keep) and cross-border finance (loans, deposits and payments between countries).

It matters because the dollar sits at the centre of world money. A country that needs dollars for every import, loan repayment or reserve holding is exposed to two risks. The first is the dollar's exchange rate. The second is the political decisions of the United States, the country that issues the dollar.

Explanation

What de-dollarisation tries to reduce: the dollar's four roles

De-dollarisation can happen in any of the four roles the dollar plays:

Role	What the dollar does today	What de-dollarisation would look like
Reserves	It has the largest share of allocated global reserves (reserves whose currency is reported to the IMF)	Central banks hold more gold, euros or other currencies
Trade invoicing	Most world trade is priced and billed in dollars, even when the US is not part of the deal	Trade is billed in the partners' own currencies
Cross-border banking	Dollar loans and deposits dominate. Payment messages run over SWIFT (the global messaging network banks use to send payment instructions)	Payment channels that do not use the dollar or SWIFT
Safe asset	Investors buy US Treasury bonds when they are afraid	Other assets, such as gold, take part of this role

• In trade, the dollar often works as a vehicle currency: a third currency used when neither partner uses its own. For example, an Indian firm and a Korean firm may settle their trade in dollars.
• The dollar's central place goes back to Bretton Woods. Under that post-war system, other currencies were pegged to the dollar and the dollar was tied to gold. The dollar kept its place even after countries moved to floating exchange rates.

Why countries want to de-dollarise

• Sanctions risk: the freezing of Russia's reserves (2022)
• After Russia invaded Ukraine, Western countries blocked Russia's access to much of its central-bank reserves.
• Other countries learned that dollar reserves can be frozen for political reasons.

• Sanctions risk is the danger that the issuing country blocks your assets or payments in its currency.

• Currency mismatch

• Poorer countries usually have to borrow in dollars, but they earn in their own currency.

• If their currency weakens, their debt grows in local terms even though they borrowed nothing extra.

• "Exorbitant privilege" of the US

• The world needs dollars, so foreigners keep buying US Treasury bonds.
• This steady demand keeps US interest rates low, so the US borrows cheaply and in its own currency.
• Other countries carry the risks of this system while the US gets most of the benefit.

Worked example: why dollar debt is risky

• An Indian firm borrows $1 million when $1 = ₹80. In rupees, the debt is ₹8 crore.
• The rupee weakens to $1 = ₹88.
• The same debt is now ₹8.8 crore. The firm owes ₹80 lakh more without borrowing a single extra dollar.
• If the loan had been in rupees, this loss would not happen. Avoiding this kind of loss is what de-dollarisation aims at.

How de-dollarisation is pursued

• Central banks buying gold: no single country issues gold or can freeze it.
• Local currency settlement (LCS): two partners settle trade in their own currencies, for example rupee and dirham for India–UAE trade.
• BRICS talk of alternative payment systems: this would let members trade without the dollar or SWIFT.
• Settling trade in the home currency: for example, India's rupee trade settlement framework (see In India).

How far has it gone? A reality check

• Latest reserve data (IMF COFER). COFER (Currency Composition of Official Foreign Exchange Reserves) is the IMF's dataset on which currencies central banks hold.
• The dollar's share was 56.77% in Q4 2025, down from 56.93% in Q3 2025 [1]. That is a fall of only 0.16 percentage points.
• The euro's share was 20.25% (Q4 2025) [1].
• The Chinese renminbi's share was only 1.95% (Q4 2025) [1].

• Total world FX reserves were $13.14 trillion (Q4 2025) [1].

• Trap: a share can change without anyone buying or selling

• COFER reports all shares in dollars [1].
• When the dollar gets stronger or weaker, the dollar value of euro or yen reserves changes too.

• So the dollar's share can move even if no central bank buys or sells anything [1].

• Conclusion: de-dollarisation is slow and partial. The dollar is still far ahead, and no single rival, including the renminbi, is close to it.

In India

• India's stated line: India's policy is to promote rupee use and reduce risk. It is not trying to de-dollarise.
• India relies on the dollar system for trade and capital, so it does not want to weaken it.

• It only wants to depend on it a little less.

• The 1991 lesson

• During the 1991 BoP crisis, India's forex reserves could pay for only about two weeks of imports.
• India had to pay for imports and debts in hard currency, mostly dollars, not rupees.

• This is the basic reason India wants more foreign use of the rupee.

• Rupee trade settlement framework (July 2022)

• The RBI allowed exports and imports to be invoiced, paid for and settled in rupees through A.P. (DIR Series) Circular No. 10, dated 11 July 2022 [4]. The Government also changed the Foreign Trade Policy to allow this [2].
• It works through a Special Rupee Vostro Account (SRVA). This is a rupee account that a partner-country bank opens with an Indian Authorised Dealer (AD) bank (a bank licensed by the RBI to deal in foreign exchange).
• The exchange rate is market-determined (set by the market, not fixed by the RBI), and SRVA balances are freely repatriable (they can be taken out of India) [2].
• SRVA balances can be invested in G-Secs and Treasury Bills without an FPI (Foreign Portfolio Investor) licence [2]. Surplus balances can now also go into corporate debt [5].

• Since the RBI press release of 5 August 2025, AD banks can open SRVAs without prior RBI approval [3].

• Local currency settlement: the India–UAE (2023) agreement was followed by the first rupee–dirham payment for crude oil.

• RBI Inter-Departmental Group (IDG) roadmap, 5 July 2023: chaired by Radha Shyam Ratho. Its long-term goal (3+ years) is to get the INR into the SDR basket [6]. The SDR (Special Drawing Right) is the IMF's reserve asset.
• Where the rupee stands: it ranked 16th in global over-the-counter forex turnover (2019), up from 18th in 2016 [6].
• The limit: the Russia case
• After 2022, India's oil imports from Russia jumped, and Russian exporters earned large rupee sums.
• India sells Russia far less, so those rupees stayed stuck in vostro accounts.
• Russia was reluctant to accept more rupees.
• The policy fix was to let SRVA surpluses be invested in G-Secs, T-Bills and corporate debt [2][5].

Don't confuse with

• Dollarisation: this is the opposite process. A country uses the dollar alongside its own currency or instead of it, as in Ecuador (2000) and El Salvador (2001). De-dollarisation moves away from the dollar.
• Rupee internationalisation: this means more use of the rupee in cross-border trade, investment and reserves. It is India's chosen policy. It aims to reduce risk, not to replace the dollar. De-dollarisation is the wider global trend.
• Local currency settlement (LCS): this is only one tool of de-dollarisation, limited to trade between two countries. De-dollarisation also covers reserves, banking and safe assets.
• Exorbitant privilege: this is the benefit the US gets from the dollar's dominance, meaning cheap borrowing in its own currency. It is not a special voting right in the IMF. De-dollarisation would reduce this privilege.

Prelims Hooks

• US dollar share of allocated global reserves: 56.77% (Q4 2025). Euro: 20.25%. Renminbi: 1.95%. The source is the IMF's COFER dataset [1].
• Trap: COFER shares are reported in dollars, so a stronger or weaker dollar can change the shares without any central bank buying or selling [1].
• India's rupee trade settlement framework: A.P. (DIR Series) Circular No. 10, 11 July 2022 [4]. It settles trade through a Special Rupee Vostro Account, and since August 2025 no prior RBI approval is needed to open one [3].
• Vostro = a foreign bank's rupee account with an Indian bank. Nostro = an Indian bank's foreign-currency account abroad. An SRVA is a vostro account.
• The SDR basket has five currencies: USD, EUR, CNY, JPY and GBP. INR is not in it. Getting it in is the IDG's (July 2023) long-term goal [6].
• Main triggers of de-dollarisation: the freezing of Russia's reserves (2022), BRICS talk of alternative payment systems, and central banks buying gold.

Mains Points

• India reduces risk instead of openly de-dollarising.
• Settling trade in rupees lowers India's need for dollars and protects traders from exchange-rate moves.
• This addresses the 1991-type weakness of too few forex reserves.

• Because India does not openly de-dollarise, it avoids straining ties with the US. This supports its strategic autonomy (GS-II).

• Geoeconomics of sanctions.

• The 2022 freezing of Russia's reserves showed that a reserve currency can be used as a weapon.
• This has sped up gold buying, LCS deals and BRICS payment talks.

• For India, spreading payments across several channels, such as LCS with the UAE and cross-border UPI, protects economic security (GS-III).

• Why de-dollarisation is slow.

• A rival currency needs deep bond and FX markets and fuller capital account convertibility (freedom to convert the currency for investment and asset deals, not just for trade).
• The rupee has only partial convertibility and shallow markets.
• India also runs a trade deficit, so partners pile up rupees they cannot spend, as in the Russia vostro case.
• So the IDG follows a phased path: short term, then medium term, then the SDR basket in the long term [6].

Related concepts

• Dollarisation
• Rupee internationalisation
• Rupee trade settlement
• Nostro and Vostro accounts
• Local currency settlement

Read more

• Dollar dominance, de-dollarisation and rupee internationalisation