De-dollarisation

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Context (IE): The RBI Governor explained that India is not working on de-dollarisation but is concentrating on reducing risks to its domestic trade caused by global political tensions.

What is De-dollarisation?

De-dollarisation refers to reducing reliance on the U.S. dollar as the primary reserve currency, medium of exchange, or unit of account. This involves countries diversifying their foreign reserves and conducting international trade in alternative currencies.

Reduce dependency on the U.S. dollar: This can help countries mitigate risks associated with fluctuations in the dollar’s value and changes in U.S. monetary policy.
Enhance economic sovereignty: Using alternative currencies, countries can reduce their vulnerability to U.S. economic sanctions and restrictions.
Promote global financial stability: Diversifying reserve currencies can reduce the global financial system’s dependence on a single currency, potentially leading to a more balanced and resilient system.
Regional Cooperation: Some regions, like BRICS (Brazil, Russia, India, China, and South Africa), are discussing using local currencies for trade to reduce reliance on the U.S. dollar.

Transition Costs: Switching from the U.S. dollar to other currencies involves significant expenses, including updating financial systems and renegotiating trade agreements.
Market Volatility: Introducing new currencies can cause market instability and uncertainty, potentially disrupting global trade and investment.
Lack of Trust and Acceptance: Alternative currencies must gain widespread acceptance and trust, which can be challenging given the entrenched dominance of the U.S. dollar.
Geopolitical Tensions: Efforts to reduce reliance on the U.S. dollar may lead to geopolitical tensions and conflicts, which can be perceived as a challenge to U.S. economic dominance.
Institutional Inertia: Financial institutions and businesses are accustomed to using the U.S. dollar, and changing established practices requires considerable effort and willingness to adapt.

Country	Key Initiatives	Details
India	Local Currency Trade Agreements	Signed agreements with Russia and UAE to conduct trade in rupees, reducing reliance on the U.S. dollar.
	Vostro Accounts	Opened special Vostro accounts to facilitate trade in local currencies.
Russia	SPFS (System for Transfer of Financial Messages)	Developed SPFS as an alternative to SWIFT, enabling transactions without the U.S. dollar.
	Gold Reserves	Increasing gold reserves to diversify away from the U.S. dollar.
China	CIPS (Cross-Border Interbank Payment System)	Established CIPS to facilitate yuan transactions globally.
	Currency Swap Agreements	Entered into agreements with several countries to promote the yuan in international trade.
South Africa	Regional Currency Use	Encouraged the use of the South African rand in regional trade within Africa.