India is wary of over-dependence on the dollar. So, the RBI has increased gold purchases. To partially de-risk its trade ties, India is pushing for trade in domestic currencies. Here’s what to know
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. (Express photo)
Reserve Bank of India (RBI) Governor Shaktikanta Das said on Friday (December 6) 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.
Das said that BRICS (Brazil, Russia, India, China, South Africa) nations have discussed the possibility of a shared currency, but reached no decision. 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.
“This is not about de-dollarisation; it is about de-risking our trade,” Das said. “The geographical spread of BRICS nations is a factor to consider. Unlike the Eurozone, with its geographical contiguity enabling a single currency, BRICS countries are spread across diverse regions, posing unique challenges,” he said.
A key reason India is not backing de-dollarisation is the rise of the Chinese yuan as a challenger to the US dollar. India has resisted using the yuan for Russian oil imports, even as the acceptance of the currency is growing in Russia. Following the Western sanctions on Russia, including freezing $300 billion in Russian foreign holdings, the yuan became Russia’s most traded currency last year.
At the same time, India is wary of over-dependence on the dollar. The RBI has increased gold purchases, and has begun moving its gold, held abroad, back into the country.
While this is in part due to increased uncertainties after the war in Ukraine, it is in line with the buying of gold by global central banks fearing secondary sanctions.
Why are central banks on a gold-buying spree?
Central banks, particularly in emerging market economies, have increased their gold holdings sharply so as to diversify away from a dollar-dominated financial system.
According to JP Morgan, central banks collectively bought a net 1,136 tonnes of gold in 2022, the highest annual demand on record, and another 1,037 tonnes in 2023.
The World Gold Council, the London-headquartered international trade association for the gold industry, said last week that central banks had reported 60 tonnes of net gold purchases in October. “The Reserve Bank of India (RBI) led the field, adding 27 tonnes of gold to its reserves, followed by Turkey and Poland – 17 tonnes and 8 tonnes respectively,” the Council said.
Notably, China, which has fulfilled much of the demand originating from sanctions-hit Russia and is engaged in a trade war with the United States, has bought a record amount of gold in the last two years. In 2023, the People’s Bank of China bought more gold than any other central bank.
The Currency Composition of Official Foreign Exchange Reserves (COFER) of the International Monetary Fund (IMF) shows a gradual decline in the share of the dollar in central bank and government foreign reserves. The gains of the yuan, especially, “match a quarter of the decline in the dollar’s share”, the IMF said.
A JP Morgan report said the increase in gold purchases by central banks reduced their need for precautionary reserves of US dollars and US treasuries, which freed up capital for growth-boosting projects.
How does the high cost of holding dollars play out in this scenario?
Depleting dollar reserves amid surging oil prices has recently caused considerable social and political unrest in India’s neighbourhood. Sri Lanka, Bangladesh, Nepal, and Pakistan witnessed sharp declines in their dollar reserves following the Ukraine war, which upset their trade relations with India. While India has managed to keep a robust reserve, the surging value of the dollar has become a concern.
To partially de-risk its trade ties, India is pushing for trade with Russia and the UAE in domestic currencies that could help cut reliance on the US dollar. However, the domestic currency trade has not yet picked up as expected because of India’s low foothold in goods and services trade internationally.
India’s efforts toward internationalising the rupee could get a boost if oil exporters begin accepting rupee payments. But they have remained hesitant due to the high transaction
A reason for the rise of the yuan has been its use in purchasing Russian oil. As China and Russia have a bilateral trade balance, both countries have been able to reduce reliance on the US dollar by successfully trading in domestic currency. India has a bilateral trade deficit with most countries except the US.