Dollar dominance, de-dollarisation and rupee internationalisation

Detail

1. Why one currency sits at the centre

• Reserve currency: a foreign currency that central banks hold as part of their foreign exchange reserves. They use these reserves to pay for imports, repay foreign debt and defend their own currency.
• Vehicle currency: a third currency used when neither trading partner uses its own. For example, an Indian firm and a Korean firm settle their trade in US dollars.
• Bretton Woods link: under the post-war Bretton Woods system, other currencies were pegged to the dollar and the dollar was tied to gold. This put the dollar at the centre of world finance. The dollar stayed there even after countries moved to floating rates.
• India's own lesson (1991 BoP crisis):
• India's forex reserves fell so low that they could pay for only about two weeks of imports.
• Those imports and debts had to be paid in hard currency, mostly dollars. India could not pay in rupees.
• This is the basic reason India wants the rupee used more abroad: it would need fewer dollars for its own trade.

2. The dollar's four roles

Role	What it means
Reserves	The largest share of allocated global reserves (reserves whose currency is reported to the IMF)
Trade invoicing	Most world trade is priced and billed in dollars, even when the US is not a party to the trade
Cross-border banking	Dollar loans and deposits dominate international banking. Payment messages run over SWIFT (the global messaging network banks use to send payment instructions)
Safe asset	US Treasury bonds are what investors buy when they are afraid

• Latest reserve data (IMF COFER):
• COFER (Currency Composition of Official Foreign Exchange Reserves) is the IMF's dataset on which currencies central banks hold.
• Dollar share: 56.77% (Q4 2025), down from 56.93% in Q3 2025 [2]. (NCERT scaffold: about 57-58%.)
• Euro share: 20.25% (Q4 2025) [2].
• Chinese renminbi share: only 1.95% (Q4 2025) [2].
• Total world FX reserves: $13.14 trillion (Q4 2025) [2].

• Trap: COFER reports all shares in dollars. So when the dollar gets stronger or weaker, the shares can change even if no central bank buys or sells anything [2].

• "Exorbitant privilege": the special benefit the US gets from issuing the world's main currency.

• The world needs dollars, so foreigners buy US Treasury bonds.
• This steady demand keeps US interest rates low.
• So the US borrows cheaply, and in its own currency. It can never run short of the currency it owes, which is why a 1991-type crisis is very unlikely for the US.
• Poorer countries usually have to borrow in dollars. This creates currency mismatch: their income is in their own currency but their debt is in dollars.

Worked example: why dollar debt is risky

• An Indian firm borrows $1 million when $1 = ₹80. The debt in rupees is ₹8 crore.
• The rupee weakens to $1 = ₹88.
• The same debt is now ₹8.8 crore. The firm owes ₹80 lakh more even though it borrowed nothing extra.

3. Dollarisation

• Dollarisation: using the US dollar alongside, or instead of, the national currency.
• Full (official) dollarisation: the dollar becomes legal tender and replaces the local currency.
• Ecuador (2000), El Salvador (2001).
• Zimbabwe (multicurrency system from 2009), adopted after hyperinflation.

• Cost: the country gives up its own monetary policy (control over interest rates and the money supply) and its exchange rate.

• Partial dollarisation: people keep bank deposits or make big purchases in dollars because they do not trust the local currency. This is common in stressed economies with high inflation.

• Why it happens: high inflation and a falling currency make people prefer dollars as a store of value.

4. De-dollarisation

• De-dollarisation: reducing reliance on the dollar in trade, reserves and finance.
• Triggers:
• Freezing of Russia's reserves (2022): after the Ukraine invasion, Western countries blocked Russia's access to much of its central-bank reserves.
  • Other countries saw that dollar reserves can be frozen for political reasons.
  • This is sanctions risk: the danger that assets or payments in a currency get blocked by the country that issues it.
• BRICS talk of alternative payment systems, so members can trade without the dollar or SWIFT.

• Central banks buying gold: gold is a reserve asset that no single country issues or can freeze.

• Reality check: the dollar's share fell only slightly, to 56.77% (Q4 2025), and the renminbi is still under 2% [2]. De-dollarisation is slow and partial.

• India's stated line: India's policy is to promote rupee use and reduce risk. It is not trying to de-dollarise.
• India does not want to hurt the dollar system, which it relies on for trade and capital.
• It wants to depend on it a little less.

5. Rupee internationalisation

• Rupee internationalisation: more use of the rupee in cross-border trade, investment and reserves.
• Benefits:
• Less exchange-rate risk for Indian traders, because they are billed in their own currency.
• India needs fewer forex reserves, since fewer payments must be made in dollars.
• Lower cost of converting money (no double conversion: rupee → dollar → dirham).

• More bargaining power in trade and finance.

• Where the rupee stands: the rupee ranked 16th in global over-the-counter forex turnover (2019), up from 18th in 2016. Its average daily turnover grew 96.1% between 2016 and 2019 [8].

• Old base: rupee arrangements with Bhutan and Nepal have existed for a long time. Sri Lanka formally made the rupee a designated foreign currency, a step towards wider use [7].

6. Rupee trade settlement: the July 2022 framework

• What it is: an RBI framework (July 2022) that lets exports and imports be invoiced, paid for and settled in rupees (INR).
• Legal basis: A.P. (DIR Series) Circular No. 10, dated 11 July 2022, "International Trade Settlement in Indian Rupees (INR)" [5].

• The Government also changed the Foreign Trade Policy to allow this [3].

• Special Rupee Vostro Account (SRVA): a special 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), used to settle trade in rupees.

• How it works (step by step):
• The Indian importer pays rupees into the foreign bank's SRVA in India.
• The foreign exporter's bank credits the exporter in local currency.
• For Indian exports, money flows the other way, paid out of the SRVA balance.

• No dollar is used at any step.

• Key features:

• The exchange rate is market-determined (set by the market, not fixed by the RBI) [3].
• Rupee exposure can be hedged, meaning the account holder can protect themselves against rupee moves [3].
• The balance, and income earned on its investment, is freely repatriable (it can be taken out of India) [3].
• SRVAs can be funded by trade receipts, inward remittances or transfers from other repatriable rupee accounts [3].

• Persons Resident Outside India (PROIs) can use SRVA balances to settle genuine transactions with other non-residents [3].

• How an SRVA differs from an ordinary Rupee Vostro Account:

• SRVA balances can be invested in government securities (G-Secs) and Treasury Bills without an FPI (Foreign Portfolio Investor) licence [3].

• An existing ordinary vostro account cannot be converted into an SRVA [3].

• Later easing:

• Earlier, opening an SRVA needed prior RBI approval. The RBI removed this requirement, so AD banks can now open SRVAs without asking the RBI (press release, 5 August 2025) [4].
• Surplus SRVA balances may now also be invested in corporate debt. The RBI decided this in consultation with the Government [6].

7. Nostro vs vostro

Nostro ("ours")	Vostro ("yours")
An Indian bank's account abroad, in foreign currency	A foreign bank's account with an Indian bank, in rupees
Example: SBI's dollar account with a bank in New York	Example: a Russian bank's rupee account with an Indian bank
Used when India pays or receives in foreign currency	Used when trade is settled in rupees (the SRVA is a special vostro account)

• Memory tip: the same account is "nostro" for the bank that owns it and "vostro" for the bank that holds it.

8. Local currency settlement (LCS)

• Local currency settlement (LCS): settling bilateral trade in the two partners' own currencies instead of the dollar. Example: rupee and dirham for India–UAE trade.
• Agreements:
• UAE (2023): the first rupee–dirham payment for crude oil followed.

• Indonesia, the Maldives and Mauritius (the scaffold says to verify these; no official source was retrieved for this note).

• The RBI group's short-term plan asks for LCS frameworks, making bilateral currency swaps work in practice, and adding the rupee as a settlement currency in the Asian Clearing Union (ACU) [8]. A currency swap is an agreement between two central banks to exchange each other's currencies.

Worked example: LCS saves conversion costs

• Old route: an Indian refiner turns ₹84 into $1, and the UAE seller turns $1 into dirhams. There are two conversions, each with a fee and a rate risk.
• LCS route: the rupee is converted straight into dirhams at the rupee–dirham rate. There is one conversion and no dollar is needed.

9. RBI Inter-Departmental Group (IDG) roadmap (2023)

• Report released: 5 July 2023. Chair: Radha Shyam Ratho, Executive Director, RBI [8].
• Scaffold points:
• Rupee lending to non-residents.
• INR accounts for non-residents abroad.
• Wider use of the rupee in trade settlement and bond markets.

• INR in the SDR basket as a long-run goal. The SDR (Special Drawing Right) is the IMF's reserve asset. Its value is based on a basket of five currencies: the dollar, euro, renminbi, yen and pound.

• Phased plan [8]:

• Short term (0-1 year):
  • A standard framework for rupee trade deals.
  • Rupee accounts for non-residents, both in India and abroad.
  • Cross-border links for UPI, RTGS and NEFT.
  • A 24×5 global rupee market.
  • Adding Indian G-Secs to global bond indices.
  • Export incentives for trade settled in rupees.
• Medium term (1-3 years):
  • Review the tax on Masala bonds (rupee-denominated bonds issued abroad).
  • Add the rupee to Continuous Linked Settlement (CLS), a global system that settles FX trades safely.
  • Allow offshore rupee banking through branches of Indian banks.

• Long term (3+ years): get the rupee included in the SDR basket.

• UPI cross-border links are covered in the payment-systems-digital-finance note.

10. Constraints

• Partial capital account convertibility:
• Capital account convertibility means freedom to convert the rupee into foreign currency, and back, for investment and asset deals, not just for trade.
• India allows this only partly.

• So foreigners cannot freely invest or move the rupees they hold. This makes the rupee less attractive to hold.

• Shallow markets: India's bond and FX markets are small and thin. Large holders cannot easily buy or sell without moving prices.

• Persistent trade deficit:
• India imports more than it exports.
• Partners receive more rupees than they can spend on Indian goods.

• Rupees pile up that they cannot use.

• Russia case:

• After 2022, India's oil imports from Russia jumped. Russian exporters earned large rupee sums.
• India sells Russia far less, so the rupees stayed stuck in vostro accounts.
• Russia was reluctant to accept more rupees. This showed the limit of rupee settlement.
• The policy fix: allow SRVA surpluses to be invested in G-Secs, T-Bills and corporate debt [3][6].

Worked example: the surplus problem

• India buys ₹10,000 crore of oil from Country X and sells it ₹2,000 crore of goods.
• ₹8,000 crore stays in X's SRVA.
• Unless X can invest it in Indian bonds or use it to pay third countries, X will ask to be paid in dollars next time.

Prelims Hooks

• The RBI framework for invoicing and settling trade in INR is A.P. (DIR Series) Circular No. 10, dated 11 July 2022 [5].
• Vostro = a foreign bank's rupee account in an Indian bank. Nostro = an Indian bank's foreign-currency account abroad. An SRVA is a type of vostro account.
• Since August 2025, AD banks can open SRVAs without prior RBI approval [4].
• SRVA balances can be invested in G-Secs and T-Bills without FPI registration, and are freely repatriable [3].
• US dollar share of allocated global reserves: 56.77% (Q4 2025). Euro: 20.25%. Renminbi: 1.95% [2]. The data source is the IMF's COFER dataset.
• The RBI IDG on INR internationalisation (July 2023) was chaired by Radha Shyam Ratho. Its long-term goal is INR in the SDR basket [8].
• The SDR basket has five currencies: USD, EUR, CNY, JPY and GBP. INR is not in it.
• Full dollarisation: Ecuador (2000), El Salvador (2001). Zimbabwe: multicurrency from 2009.
• "Exorbitant privilege" is the US's ability to borrow cheaply in its own currency. It is not a special voting right in the IMF (a common trap).

Mains Points

• Rupee internationalisation reduces risk instead of replacing the dollar.
• Settling trade in rupees lowers India's need for dollars and cuts exchange-rate risk for traders.
• This directly addresses the 1991-type weakness of too few forex reserves.

• India avoids openly de-dollarising, so it does not strain ties with the US.

• The trade-off is between convertibility and stability.

• A truly international rupee needs fuller capital account convertibility and deep bond and FX markets.
• But that also exposes India to sudden capital outflows and a volatile rupee.

• So the IDG takes a phased path: short term, then medium term, then SDR in the long term [8].

• The trade-deficit limit.

• Rupee settlement works only if partners can use the rupees they earn.
• The Russia vostro build-up showed this.

• Real fixes: let partners invest the rupees (G-Secs, corporate debt) [3][6], raise exports, and make the rupee usable between third countries.

• Geoeconomics of sanctions.

• The 2022 freezing of Russia's reserves showed that reserve currencies can be used as weapons.
• This speeds up gold buying, LCS deals and BRICS payment talks.
• For India, spreading its payment channels across currencies (LCS with the UAE, cross-border UPI) is a way to protect economic security (GS-III) and keep strategic autonomy in foreign policy (GS-II).