For decades, the United States Dollar (USD) has reigned as the world’s undisputed reserve currency. From oil payments to international loans, from foreign trade settlements to forex reserves, the dollar has dominated global finance. India, like most countries, has long been bound to this dollar-centric system. But as the world economy undergoes profound shifts, a new question emerges: should India begin to look beyond the dollar, and if so, what would it mean for our economy?
The dollar’s dominance is not accidental. Born out of the Bretton Woods agreement of 1944, the USD became the anchor of global trade, tied initially to gold and later buoyed by the sheer economic and military might of the United States. Even today, around 80 per cent of global trade transactions are dollar-denominated. Nobel laureate Paul Krugman once remarked, “The dollar is not just America’s currency, it’s the world’s currency,” underlining the deep-rooted trust it enjoys. Yet, as geopolitical tensions mount and the world grows more multipolar, cracks are beginning to appear in this century-long dominance. Christine Lagarde, President of the European Central Bank, recently observed that the global financial system is “moving from unipolar to multipolar,” hinting at a future where multiple currencies share the stage. For India, this could be both a challenge and an opportunity.
One of the strongest arguments for India to reduce its dollar dependence is the vulnerability caused by exchange rate fluctuations. Every time the U.S. Federal Reserve raises interest rates, the dollar strengthens and emerging markets like India face capital outflows, inflationary pressures, and rising import costs. As former RBI Governor Raghuram Rajan once warned, “What happens in the Federal Reserve does not stay in the Federal Reserve.”
A stronger dollar can drain billions from India’s economy overnight. Beyond economics, there is also a geopolitical dimension. The U.S. has frequently used its control of the dollar-based system as a tool of sanctions. Countries like Iran and Russia have been effectively cut off from global finance. Commenting on this, Russia’s President Vladimir Putin argued, “The dollar has become a political weapon.” For India, aspiring to chart an independent global role, building alternatives is not merely economic pragmatism, it is strategic foresight.
Recognising these vulnerabilities, India has already begun testing alternatives. The Reserve Bank of India (RBI) recently allowed trade settlements in rupees, opening Special Vostro Rupee Accounts (SVRAs) for countries like Russia, Sri Lanka, and Mauritius. The idea is simple: Indian exporters can be paid in rupees instead of dollars, while importers also settle their dues in rupees. This not only saves foreign exchange reserves but also nudges the rupee toward international acceptance. Another development is India’s trade in currencies like the UAE Dirham and Chinese Yuan. Given that the Gulf countries supply much of India’s crude oil, settling payments in dirhams could significantly reduce exposure to dollar swings. Similarly, as China remains one of India’s largest trading partners, using yuan for trade could provide short-term stability, though concerns remain over China’s tight currency controls.
The benefits of currency diversification are clear. It could help India reduce vulnerability to dollar fluctuations, enhance economic sovereignty by making policies less tied to U.S. monetary decisions, strengthen the rupee by boosting its global standing, and support the vision of a multipolar world finance system that BRICS nations are actively promoting. As S. Jaishankar, India’s External Affairs Minister, pointed out at a BRICS summit, “The era of one dominant currency is drawing to a close. A world of many currencies is not only desirable, it is inevitable.” However, the challenges are equally formidable. The biggest is trust and acceptance. The dollar is seen as a “safe haven” because of America’s transparent financial markets, liquidity, and institutional strength. In contrast, neither the rupee nor the yuan enjoys the same global confidence. Larry Summers, former U.S. Treasury Secretary, famously remarked, “The dollar is the cleanest shirt in the dirty laundry of currencies.” Until India deepens its financial markets and stabilises its currency, convincing global investors to use the rupee will remain difficult.
There are also concerns about transaction complexities. If India settles oil in dirhams, exports in rupees, and technology imports in euros, it risks higher transaction costs and logistical hurdles compared to a single-dollar benchmark. Moreover, foreign investors, who bring billions of dollars in FDI and FII into India, prefer dollar-backed stability. Sudden moves away from the dollar could shake their confidence. At the same time, the sheer depth of US markets ensures that, even in moments of global turmoil, investors rush back to the dollar, reinforcing its dominance.
