Currency Wars and De-dollarisation: Impact on India

In the world of international trade and economics, the terms "currency wars" and "de-dollarisation" are making headlines. But what do they mean, and why should they matter to us, especially in a country like India?

What Are Currency Wars?

Imagine two countries competing in a market to sell their products. If one country lowers the value of its currency (called devaluation), its goods become cheaper for other countries to buy. This makes it easier to sell more products abroad. However, this can hurt other countries that are trying to sell their goods because their products might become more expensive.

When countries deliberately devalue their currencies to gain this trade advantage, it’s called a currency war. It's like a race where each nation tries to make its currency weaker than the other’s.

What Is De-dollarisation?

For decades, the US dollar has been the main currency used for international trade and global reserves. However, some countries, particularly BRICS nations (Brazil, Russia, India, China, and South Africa), are now trying to reduce their reliance on the dollar. This process is known as de-dollarisation.

Main reasons for De-dollarisation

1. To protect themselves from US sanctions: Increasing geopolitical tensions and US sanctions on countries like Russia and Iran have highlighted the risks of dollar dependency. By diversifying away from the dollar, nations can shield their economies from such external pressures.

2. To avoid being dependent on the US economy: Emerging economies want greater control over their financial systems, reducing exposure to US monetary policies that often impact global markets.

3. To strengthen their own currencies: Countries like China, Russia, and even India are working towards using their own currencies or alternative systems for trade instead of the dollar.

4. Technological Advances: Blockchain and digital currencies are creating alternatives to traditional financial systems dominated by the dollar.

Why Are These Issues Important?

Both currency wars and de-dollarisation can reshape the global economy, affecting prices, trade, and financial stability.

Impact on India

1. Trade: If major trading partners devalue their currencies, India might face difficulties exporting goods because Indian products would become relatively more expensive. However, cheaper imports from these countries can lower costs for Indian consumers.

2. Oil Prices: India imports most of its oil, and it’s usually priced in dollars. De-dollarisation could reduce the impact of fluctuations in the US dollar on oil prices. If India starts paying for oil in rupees or other currencies, it could stabilize costs in the long term.

3. Global Influence: India’s participation in de-dollarisation efforts, such as through trade agreements in rupees, could boost the global importance of the Indian rupee.

4. Economic Growth: A stable and stronger rupee can attract more foreign investments and make India’s economy more resilient. But if currency wars create uncertainty in global markets, it could slow down India’s growth.

What Should India Do?

To handle currency wars and de-dollarisation, India can:

1. Use the Rupee for Trade: Over 88% of global trade, including India’s, is conducted in US dollars, making diversification a complex yet necessary task. India can trade with friendly countries using the Indian rupee instead of the US dollar.

2. Diversify Reserves: As of 29th November 2024, India’s forex reserves stood at $658.58 billion, with a significant portion held in US dollars. India can reserves in different currencies (like euros or yen) and invest in gold.

3. Strengthen the Economy: Grow industries, control inflation, and maintain stable prices.

4. Energy Security: Sign oil deals in rupees and invest in renewable energy to reduce fuel imports.

5. Expand Trade Partnerships: Build strong trade relations with other countries and regional groups like BRICS.

6. Digital Currency: Use the Digital Rupee for international payments to reduce dollar reliance.

Currency wars and de-dollarisation represent a shift in global economics. While these changes bring challenges, they also offer opportunities for countries like India to redefine their role in the world economy. By taking the above steps, India can not only protect itself from the negative impacts of currency wars and de-dollarisation but also position the rupee as a stronger global currency. This will enhance India's economic position and reduce vulnerability to global financial uncertainties.