From Dominance to Balance: India and the New Era of Multipolar Currencies"

 From Dominance to Balance: India and the New Era of Multipolar Currencies"

What is de-dollarization?

Definition and scope
De-dollarization refers broadly to efforts by a country (or a group of countries) to reduce or eliminate dependence on the U.S. dollar in their international and domestic financial architecture. More precisely, it involves:

• Shifting trade invoicing and settlement away from the dollar to alternative currencies or local currencies
• Altering the composition of foreign exchange reserves (moving out of dollar assets into other currencies, gold, SDRs, etc.)
• Reducing exposure to U.S. dollar-denominated liabilities (debt issuance, foreign liabilities)
• Developing alternative payment and settlement systems (bypassing SWIFT or U.S.-centric financial infrastructure)
• Promoting the internationalization of local currencies (i.e., making them usable beyond domestic borders)

In short, de-dollarization is about altering the structural role of the dollar in global trade, finance, reserves, and payments.

It is important to distinguish structural de-dollarization from cyclical fluctuations in the use of the dollar. Short-term dollar demand may rise or fall depending on macro shocks or safe-haven flows; de-dollarization implies enduring shifts in patterns of currency use.

 

2. Why countries (including India) look toward de-dollarization

There are both geopolitical and economic motivations driving the shift. Below are the main rationales:

2.1 Geopolitical motives

1. Sanction risk / weaponization of finance
   The U.S. dollar’s dominance gives the United States considerable leverage: financial sanctions (blocking access to dollar clearing, freezing assets, restricting dollar usage) can be a potent tool of coercive diplomacy. Countries facing such threats (e.g. Russia, Iran) see high risk in holding dollar-denominated assets or relying heavily on dollar infrastructure. Strategic autonomy / reduced dependency
   In a multipolar world, states want more economic sovereignty and less exposure to foreign policy contingencies emanating from U.S. monetary policy or financial sanctions. Reducing dollar dependence is a way to insulate against external coercion.
2. Shifting alliances and bloc formation
   As nations cluster into economic or geopolitical blocs (e.g., BRICS, Shanghai Cooperation, regional frameworks), a shared effort to de-dollarize enhances the bloc’s financial independence and mutual resilience. Russia–China bilateral trade in ruble/yuan, or a prospective BRICS payment system, are examples. 2.2 Economic and financial motives

1. Reserve diversification
   Holding large dollar reserves is risky: when the dollar depreciates, one’s reserves lose real value; conversely, rising U.S. interest rates can raise the opportunity cost of holding dollar assets. Countries may seek to diversify into other currencies, gold, or SDRs. Exchange rate shock insulation / monetary autonomy
   Heavy reliance on the dollar means domestic economies face spillovers from U.S. monetary policy and dollar volatility. Reducing dollar exposure can lower vulnerability to “imported” instability.
2. Reduced transaction costs and currency mismatch risk
   For countries trading heavily with neighbors or regional partners, the use of a third-party currency like the dollar introduces conversion cost, liquidity risk, and exchange mismatch. Direct settlement in local or regional currencies can reduce friction. Deepening local currency financial markets
   Issuing debt, building liquidity and hedging markets in local currency becomes more viable and credible when countries reduce the dominance of foreign currency debt (or reliance on dollar funding). This helps reduce vulnerability to currency mismatches and sudden reversals.
3.  International payment innovations
   Advances in payment technology — particularly central bank digital currencies (CBDCs), cross-border digital infrastructure, blockchain-based systems — lower the cost and friction of settling transactions outside the dollar system. Some see CBDCs as a vehicle for de-dollarization.

3. Empirical evidence and current state: how far has de-dollarization progressed?

De-dollarization is real, but gradual. The dollar still dominates many domains, but shifts are noticeable in some areas.

3.1 Dollar’s share of FX reserves

• According to IMF’s COFER data, the U.S. dollar’s share of allocated foreign exchange reserves has declined over the past two decades. For example, from 2014 to 2024, the dollar + euro shares declined. In that period, the share of non-major currencies rose. Yet, the dollar remains the preeminent reserve currency, well ahead of other currencies. 3.2 International trade and invoicing
•  

• Many bilateral trade agreements now include provisions for settlement in local currencies or alternative currencies (not just the dollar). In the BRICS+ grouping, the share of U.S. dollar in cross-border bank claims and international debt has shown signs of decline. However, in the domain of trade financing, commodities, bond issuance, and broad cross-border payments, the dollar remains strongly entrenched.
•  3.3 Alternative payment systems and infrastructure

• Systems like China’s CIPS (Cross-Border Interbank Payment System) aim to provide a non-dollar clearing alternative.
• Some countries are exploring or launching their own payment messaging systems (analogous to SWIFT alternatives).
• CBDC initiatives as a cross-border settlement mechanism are under research and pilot around the globe (e.g., mBridge among China/UAE/Thailand).
• 3.4 Gold accumulation and other reserve shifts

• Some central banks are aggressively increasing gold holdings, seeing it as a hedge or safe asset outside the dollar system. Indeed, central banks added over 240+ metric tons in Q1 2025 alone.
• In some cases, gold holdings by central banks have surpassed their holdings of U.S. Treasuries — seen as an indication of diversifying away from dollar instruments.
• 3.5 Limits: Where de-dollarization lags

• In international capital markets, issuance and trading are still heavily dollar-centric. The depth and liquidity of U.S. capital markets are hard to match.
• SWIFT and dollar-clearing infrastructure is deeply embedded; transitioning away is costly and complex.
• Network externalities: the dollar’s ubiquity means counterparties often prefer the path of least friction (i.e., dollar).
• Market confidence, credit ratings, hedging and derivative markets (which are dollar-rich) reinforce the dollar’s dominance.
• Some recent analyses suggest that despite efforts, the dollar’s dominance remains relatively secure in the near to medium term.
• Thus, the trend is incremental rather than revolutionary.

 

4. Challenges/risks in de-dollarizing (especially for India or conflict-prone states)

While the motivation is strong, executing de-dollarization is fraught with risks, tradeoffs, and constraints. Below I enumerate key challenges:

4.1 Market liquidity, depth, and confidence

• Liquidity premium and capital market depth: The U.S. financial markets offer unmatched liquidity, deep hedging instruments, derivative markets, and investor confidence. Shifting large volumes into less developed markets incurs premium costs and lower depth.
• Credit rating and sovereign trust: International investors may demand risk premiums for bonds denominated in a relatively less tradable currency. The currency risk becomes a deterrent.
• Currency volatility and convertibility risk: Local currencies (or alternative foreign currencies) may be less stable, which heightens risk if entities are exposed to exchange rate swings.

4.2 Network and coordination effects

• Dollar’s entrenched status: Because so many parties (exporters, importers, lenders, investors) use the dollar, switching away can face inertia and resistance.
• Counterparty acceptance: Some trading partners or financial intermediaries may still insist on dollar settlement because of established norms, liquidity, or hedging convenience.
• Interoperability and system integration: Settlement systems, banking networks, cross-border infrastructure are built for dollar systems; modifying or replacing them entails high fixed costs and coordination challenges.

4.3 Currency mismatch, transitional risks, and legal constraints

• Transitional mismatch: Entities (firms, governments) may already have dollar-denominated liabilities or trade receivables. Sudden shifts could leave mismatches, currency losses, or insolvency risk.
• Legal, contractual, and regulatory constraints: Many contracts, sovereign bonds, and trade agreements are denominated in USD. Renegotiating or shifting such terms can face legal and reputational risk.
• Resistance from vested interests: Banks, exporters, importers, hedgers, and financial intermediaries accustomed to dollar-based operations may resist change (especially if it lowers their margins).

4.4 Monetary and macro instability risk

• Pass-through inflation risk: More volatile exchange rates could transmit inflation pressures.
• Capital flight and confidence risk: If markets distrust the home currency or the transition process, it could trigger capital flight.
• Balance of payments or reserve adequacy stress: If reserves are partly shifted prematurely, there may be shortfalls in liquidity or external buffer.

4.5 Geopolitical backlash and retaliation

• The U.S. and its allies may view aggressive de-dollarization as strategic challenge; steps to isolate or penalize countries may follow (e.g., financial sanctions, limiting access to dollar markets).
• Countries overly aligned with one’s bloc (e.g., heavily using a rival’s currency) may face political pressure or dependency.

4.6 Gradualism and path dependency

• The shift is likely to be slow and evolutionary; expecting rapid change could backfire.
• Partial attempts without coordination may fragment trade flows or create inefficiencies.

 

5. India’s position, constraints, and policy levers

India finds itself in a delicate position: it has strong incentives to reduce dollar exposure, particularly given recent global volatility and geopolitical uncertainty, but it also must manage financial stability, market confidence, and external constraints. Below is an assessment of India’s current status and possible strategies.

5.1 Current status & constraints

• Forex reserves: India’s foreign exchange reserves (as of 2024–2025) are substantial (≈ US$700+ billion).
• External debt: As of June 2024, India’s external debt stood at a record high ~US$682 billion.
• Trade invoicing: Most of India’s cross-border trade is still invoiced in or settled via U.S. dollars or major international currencies.
• Currency swap agreements and local currency trade: India has over 20 currency swap agreements (with Japan, Russia, Nigeria, South Korea etc.) to mitigate liquidity and settlement risk in non-dollar currencies.
• RBI’s stance: Historically, India has not publicly pursued an explicit de-dollarization agenda; RBI has emphasized “derisking” and diversification rather than outright repudiation of the dollar.
• Recent policy measures: RBI has recently proposed steps to boost international use of the rupee — e.g., permitting rupee-denominated loans to nonresidents in neighboring countries (Bhutan, Nepal, Sri Lanka) and establishing reference exchange rates for chosen trading partners’ currencies to ease rupee-based settlement
• Official position: The India’s Chief Economic Adviser (CEA) has clarified that India is not pursuing any plan to replace the U.S. dollar as the global trade currencyThus, India is in a cautious, incremental mode, seeking to reduce risk rather than wage a bold de-dollarization campaign.

5.2 Strategic policy levers for India (and war- or sanction-exposed countries)

Below are possible levers and recommendations that India (and similarly placed states) can use to advance de-dollarization while managing risks:

1. Promote rupee (or local currency) invoicing and settlement in trade with friendly partners
• Encourage exporters/importers, particularly in South Asia and neighboring regions, to use rupee-based contracts to reduce conversion costs and dependency on dollar corridors.
• Offer incentives (e.g., lower transaction fees, hedging support) to firms that agree to settle trade in rupees.
• Expand the use of Special Rupee Vostro accounts (where foreign banks hold rupee deposits to facilitate trade settlement).
2. Deepen and broaden currency swap arrangements / bilateral clearing frameworks
• Expand swap lines (not only with large economies, but with smaller trade partners) to provide liquidity in alternative currencies.
• Support multilateral payment platforms among aligned countries (e.g., under BRICS, SCO) to facilitate local-currency trade.
• Invest in regional clearinghouses that can process cross-border settlement in local currencies.
3. Advance a digital rupee (CBDC) with cross-border interoperability
• Leverage the digital rupee (e₹) to enable near-instant, low-cost cross-border payment with partner countries.
• Develop infrastructure and protocols so that the rupee CBDC can integrate with partner CBDCs or domestic systems for settlement.
4. Reserve diversification and strategic asset allocation
• Reduce over-reliance on dollar securities in the forex reserve portfolio; increase allocations to major non-dollar currencies, gold, SDRs, and safe instruments in other jurisdictions.
• Adopt a dynamic reserve strategy that can respond to shifts in global capital flows and risk perceptions.
• Engage in “covert” (or less visible) reserve diversification to avoid signaling large shifts that could unsettle markets.
5. Build deeper local currency bond markets and hedging instruments
• Encourage sovereign and corporate issuance in rupee and other alternative currencies (for instance, local-currency bonds targeted at international investors).
• Develop derivatives, hedging tools, interest rate swaps, and FX hedges denominated in rupee or regional currencies, to manage risk.
• Support financial market reforms that improve liquidity, regulation, and transparency in rupee-denominated markets.
6. Strengthen legal, contractual architecture for currency flexibility
• Ensure new trade and financing contracts include clauses allowing settlement in alternate currencies (currency flexibility clauses).
• Promote the use of multi-currency invoicing options among large exporters/importers.
7. Coordinate de-dollarization efforts with like-minded partners / blocs
• Collaborate inside BRICS, SCO, SAARC, ASEAN, or regional blocs to build common frameworks for settlement, payments, and currency swaps.
• Support (and help design) alternative payment networks independent of SWIFT (or interoperable with them) to reduce exposure to U.S. clearing leverage.
• Explore regional reserve pooling or stabilization funds denominated in regional or non-dollar instruments.
8. Risk management, staged transition, and communication strategy
• Pursue a phasing strategy: begin with limited pairings (e.g. rupee–rupee settlement with neighbors), test unilateral initiatives, build confidence and scale gradually.
• Monitor and manage transitional currency mismatch, hedging vulnerabilities, and potential capital flows.
• Communicate clearly with markets, firms, banks to build trust in the new arrangements and reduce uncertainty.
9. Engage in international norm-shaping and diplomacy
• Use multilateral forums (e.g. IMF, BIS, BRICS) to advocate reforms to global financial architecture (e.g., expanded role for SDRs, reforms in IMF governance).
• Push for alternative global settlement standards (multi-currency platforms, public digital clearing networks) rather than dependence solely on dollar-based systems.

5.3 What role India (and others) could play more actively

In addition to the above levers, India (together with other emerging or sanction-sensitive states) could adopt more assertive roles in reshaping global monetary order:

• Serve as a bridge actor: India, due to its diversified ties with both Western and non-Western blocs, can act as a mediator to build consensus around alternates to US-dominated financial systems.
• Be a testbed: India can pilot local-currency trade zones, rupee settlement corridors, or multi-CBDC platforms, which can serve as proofs of concept for other nations.
• Lead regional de-dollarization experiments: In South Asia, India could push for rupee settlement zones, shared clearinghouses, and cross-currency swap networks.
• Support global reform in international financial institutions: pushing for expanded SDR use, changes in IMF and BIS mandate, or regional reserve funds to reduce dominance of the dollar in global finance.
• Use geo-economic diplomacy: underlining that de-dollarization is not anti-dollar but pro-multipolar resilience, India could encourage regional partners to adopt more balanced currency use (not aligning fully behind China or Russia).

 

6. How de-dollarization plays out for war-exposed / sanction-vulnerable countries

Countries embroiled in conflict or subject to sanctions (e.g., Russia, Iran, Venezuela) have particular motivations and constraints. Their experiences yield instructive lessons:

6.1 Why de-dollarization is more urgent for them

• Sanctions target dollar access, freezing U.S. dollar denominated assets, or cutting access to U.S. financial infrastructure — a heavy vulnerability
• They cannot reliably rely on U.S. goodwill; hence they must seek alternative financial independence
• Their external financing channels are constrained; moving away from the dollar may enable access to alternative funding from friendly states

6.2 How they approach de-dollarization (with examples)

• Russia: Has aggressively reduced holdings of U.S. Treasury assets, promoted use of ruble/renminbi in trade, and developed its own messaging/clearing alternatives (e.g. SPFS) to circumvent SWIFT.
• Iran: Under prolonged sanction, Iran has used barter trade, local-currency swaps, and trading in non-dollar currencies (especially with friendly countries).
• Venezuela: Has attempted oil sales denominated in non-dollar currencies or crypto to bypass U.S. dollar restrictions
• However, these countries face acute risk: inflation, capital flight, lack of investor confidence, and limited depth in alternative markets.

6.3 Constraints and pitfalls for conflict-exposed states

• With weaker institutions and market confidence, shifting to local or alternative currencies may trigger hyperinflation or capital run risk.
• They are more exposed to retaliatory measures (e.g. U.S. pressing banks to block foreign currency transfers).
• Alternative partners may demand unfavorable terms (higher interest, stronger collateral).
• Sudden currency regime shifts may erode trust and worsen macro volatility.

Thus, for these states, de-dollarization must be carefully calibrated and resiliently designed.

 

7. Outlook, constraints, and strategic possibilities (with assessments)

7.1 Speed and scale: a gradual trajectory

De-dollarization is unlikely to happen rapidly. The dollar’s dominance is buttressed by deep financial markets, network effects, trust, and institutional inertia. Many analysts caution that while the trend is real, its pace will be slow

Even in BRICS or among major de-dollarization advocates, progress has been modest. For example, a recent report said that U.S. dollar dominance remains “secure” in the near to medium term.

Thus, the de-dollarization process will likely be piecemeal and incremental, concentrated in bilateral corridors, trade settlement zones, reserve diversification, and digital infrastructure experiments.

7.2 The dollar won’t disappear, but its dominance may erode in parts

Rather than a binary shift (dollar gone / dollar returns), what is more probable is fragmentation of global currency regimes, with multiple regional or bloc-based monetary hubs (e.g., a Chinese-yuan system, a euro-regional system, a rupee/digital-India hub). The dollar will likely remain one of several key currencies, but its dominance may wane in certain geographies or sectors.

7.3 India’s strategic balance: derisking, not confrontation

For India, wholly “replacing” the dollar is neither feasible nor desirable in the near term. The path is one of derisking — reducing exposure to a single currency, increasing flexibility, and cultivating alternatives. India should avoid making de-dollarization a hostile strategy, but rather a set of choices to build resilience and optionality.

7.4 Key risks to watch

• Loss of investor confidence: markets may interpret aggressive de-dollarization as destabilizing
• Exchange rate shocks / inflation: if alternative currencies are volatile
• Mismatches: debt or trade exposures denominated in dollars may impose transition losses
• Retaliation: from the U.S. or dollar-aligned actors via sanctions, financial isolation

7.5 Strategic possibilities in the next decade

• CBDC networks: interoperable multi-currency CBDC arrangements (e.g. India cooperating with ASEAN, SCO, or BRICS)
• Regional monetary corridors: India could pioneer rupee-based settlement corridors across South Asia and Indian Ocean rim
• Alternative global payment networks: India may play a role in building rival messaging or settlement layers, especially with emerging economies
• Active reserve co-management: Align with other major central banks to coordinate reserve diversification, possibly expanding the role of SDRs or pooled reserves
• Soft power through currency diplomacy: Using local currency trade and credit lines as part of development/diplomatic diplomacy

 

Statistical Analysis Tables on De-Dollarization

1. Global Foreign Exchange Reserves by Currency Share (IMF COFER Data)

Year	USD (%)	Euro (%)	Chinese Yuan (%)	Japanese Yen (%)	Pound Sterling (%)	Others (%)
2000	71.0	18.0	0.0	6.0	3.0	2.0
2010	62.0	24.0	0.0	4.0	4.0	6.0
2020	59.0	21.0	2.0	6.0	4.0	8.0
2023	58.4	20.5	2.7	5.5	4.6	8.3
2024*	57.0	20.0	3.1	5.7	4.7	9.5

*Source: IMF COFER, 2024 (approximate latest trends).

 

2. India’s Trade Settlement Currency Breakdown (Illustrative Estimates)

Year	USD (%)	INR (%)	Euro (%)	Yuan (%)	Others (%)
2015	86.0	2.0	6.0	2.0	4.0
2020	82.0	5.0	7.0	3.0	3.0
2023	80.0	7.0	6.0	5.0	2.0
2024*	77.0	10.0	5.0	6.0	2.0

*Note: Growing use of INR in trade with Russia, Sri Lanka, UAE.

 

3. Impact of U.S. Fed Rate Hikes on India (2015–2023)

Year	Fed Funds Rate (%)	INR Depreciation vs USD (%)	FII Outflow (US$ Billion)	India Forex Reserves (US$ Billion)
2015	0.25	4.7	-2.5	353
2018	2.25	8.0	-5.3	413
2020	0.25	2.5	-3.0	476
2022	4.50	9.2	-15.0	562
2023	5.25	10.5	-12.3	596

 

4. BRICS vs G7: Share of Global GDP (PPP terms, IMF WEO)

Year	BRICS Share (%)	G7 Share (%)
2000	18.0	45.0
2010	27.0	38.0
2020	33.0	31.0
2023	32.1	30.0
2024*	33.5	29.5

 

5. Major Countries Pushing De-dollarization (Sanctions/War-hit)

Country	Trigger for De-dollarization	Steps Taken	% Non-USD Trade Settlements (2024 est.)
Russia	U.S./EU Sanctions (Ukraine war)	Shift to yuan, ruble-rupee trade	70% (non-USD)
China	U.S. trade rivalry	Promoting CIPS, yuan oil trade	25% (non-USD)
Iran	Long-term U.S. sanctions	Oil in INR, barter	>80% (non-USD)
Turkey	Sanctions, currency crisis	Gold, yuan, lira deals	40% (non-USD)
India	Sanctions risk (Iran, Russia)	INR trade settlement, UPI cross-border	~20% (non-USD)
Brazil	Inflation, U.S. dependence	Yuan-BRL trade with China	~15% (non-USD

 

Sample Data / Tables

Table A: Currency Composition of Official Foreign Exchange Reserves (COFER) — Q1 2025 / latest

Currency	Share of Allocated Reserves (%)	Notes / changes vs prior
U.S. Dollar	~ 57.74 %	Slight decline/unchanged vs prior period
Euro	~ 19.83 %	Roughly stable; small shifts depending on exchange rate movements
Chinese Renminbi (Yuan)	~ 2.18 %	Unchanged from the previous quarter
Other currencies (incl. JPY, GBP, AUD, etc.)	~ 20.19 %	Comprises non-major currencies and “residual” group

*Note: The COFER data for Q1 2025 was revised, especially for Australian dollar and Swiss franc, but overall shares remain “marginally” affected

 

Table B: India — Key Macroeconomic / External Sector Indicators (2025 estimates or recent)

Indicator	Value (2025 or latest)	Comments / Source
USD/INR exchange rate (annual average)	~ 84.404	As reported in 2025 data series
India’s foreign exchange reserves	~ US$ 700.2 billion	As of September 2025
India’s total exports (Merchandise + Services) in Apr–Jun 2025	US$ 210.31 billion	5.94% YoY growth
Trade settlement in USD (share)	~ 85 %	For 2023–24, and indicated as still high; ~85 % of India’s trade was settled in USD.
Rupee-rouble / Rupee settlement between India & Russia	Over 90 %	More than 90% of payments now in national currencies (rouble + rupee) for India-Russia trade.
RBI policy: Opening of Special Rupee Vostro Accounts without prior approval	Yes	New circular from August 2025 allowing AD banks to open SRVAs without prior RBI approval.
Bilateral local-currency settlement initiative	INR-MUR (Mauritius) LCS System	MoU for local currency settlement between India & Mauritius.

Closing Remarks

The trajectory of de-dollarization is not about dismantling the dollar’s global supremacy overnight but about reshaping financial interdependence. For India, the move is a calculated effort: reducing risks of currency shocks, safeguarding against sanctions, and building regional economic resilience.

The U.S. dollar will likely remain the backbone of global trade and finance in 2025 and beyond, but its share is steadily declining as more economies diversify. India’s strategy reflects pragmatism: encouraging rupee settlements, opening Vostro accounts, forming local-currency trade systems with partners like Russia and Mauritius, and pushing digital payment ecosystems.

This process will be gradual and multipolar — with USD, Euro, Yuan, and INR coexisting in a rebalanced system. The key for India lies in trust-building, regulatory stability, and stronger capital markets. The success of de-dollarization will not be measured by the fall of the dollar, but by the rise of alternatives that make the global economy less fragile and more inclusive.

 

📚 References

1. International Monetary Fund (IMF). Currency Composition of Official Foreign Exchange Reserves (COFER). Q1 2025 update.
2. Reserve Bank of India (RBI). Circular on International Trade Settlement in INR. August 2025.
3. Bank of Mauritius & RBI. MoU on Local Currency Settlement System. 2025.
4. The Economic Times. India’s forex reserves sufficient for 11 months of imports. September 2025.
5. India Brand Equity Foundation (IBEF). India’s Trade and External Sector Performance. April–June 2025.
6. Economy Middle East. Over 90% of Russia–India trade now settled in rupees and roubles. 2025.
7. Khaleej Times. India pushes rupee trade to challenge dollar dominance through BRICS. 2024.
8. CEIC Data. India Exchange Rate Forecast (Annual). 2025.