Dedollarisation likely to face geopolitical challenges

The dedollarisation is a gradual journey and has to face various challenges, including geopolitical angle, said industry officials. The reported decision of India and Russia to suspend talks to settle bilateral trade in rupees is a big setback for the exporters, said an exporter.

Simply put, dedollarisation means lesser reliance on the US dollar as a medium of exchange in international trade.

"Lot of geopolitical angles would come into play in respect of dedollarisation. It depends on the kind of pressure India could face," Rakesh Shah, Director Nipha Group and former Chairman of Engineering Export Promotion Council of India (EEPC) said. For instance, Myanmar is in the Financial Action Task Force (FATF) blacklist and India is going for trade with that country which may not be liked by other countries, Shah said. The Kolkata-based 65-year-old Nipha group ships out engineering goods world over.

According to Shah, the reported decision of India and Russia to suspend talks on settling trade payments in Rupees is a big setback for the Indian importers. "Dedollarisation can work if the trade between two countries is equal. If it is lopsided then it would falter," Shah said.

In the case of India-Russia trade, the former imports a huge quantity of oil from Russia after its war against Ukraine and the Western sanctions. On the other hand, the exports to Russia from India are not much and the trade balance is lopsided in favour of Russia.

So, what will Russia do with the Indian Rupees? Some of the oil imports from Russia are being settled in some Middle East currencies, Suman Chowdhury Chief Economist and Head-Research, Acuite Ratings & Research said. Recently Russian Foreign Minister Sergey Lavrov told reporters that the country has accumulated billions of rupees in the Indian bank accounts.

Lavrov said in order to use the money, it has to be converted to another currency and the matter is being discussed. According to Shah, India can eliminate some products from the basket for rouble payment. Further fluctuation in currency will also be a hurdle for dedollarisation. For dedollarisation to work, the currency should be stable, Chowdhury added.

According to Shah, during the days of the USSR, the exchange rate was fixed between India and that country which was not a realistic one. He said immediately after the Russia-Ukraine war broke out all the business came to a halt and with rupee-rouble payment business started to pick up though the contract size came down as compared to pre-war period. The exchange rate was a fair one. Shah said there is a lot of business potential in Russia for machinery components and that country will not be getting the items from Europe.

According to Chowdhury, for dedollarisation to work for India, the country should be a big exporter and the other option is to look at other currencies. "The euro is not globally accepted and in the case of yuan it is a political challenge," Chowdhury said.

According to him, dedollarisation is not an easy path. Unless there is a synchronised plan, say a common BRICS currency, it is difficult to challenge the US dollar's position as a universal currency and a safe haven investment.

However, the good thing that people have realised is to reduce the dollar as the reserve currency and the primary medium of settling trade. In the last six months the dollar has weakened and is weakening against many currencies, Chowdhury said.

"India can look at smaller neighbouring countries where the trade balance is in its favour for rupee trade. And some steps are being taken in this regard," Chowdhury said. Whether dedollarisation happens at the macro level, at the corporate levels the 'dollar colonialism' can be removed subject to some compulsory exemptions, an industry official said.

"As regards India, the US dollar has creeped into our corporate lexicon in a subtle way - say in terms of denoting the financial numbers, market size and others," he said. "Indian corporate sector can use only the Rupee in their communications instead of the dollar. The European corporations denote their financial numbers only in euros. The 'dollar colonialism' can be removed in India as a first step towards dedollarisation," the official added.