De-Dollarization: India’s Cautious Approach to a Global Shift

Since Bretton Woods Agreement of 1944, the US dollar has been the cornerstone of the international trade and finance, pegging almost 58 percent of international foreign exchange reserve, and a substantial fraction of international debt. The dominance of US dollar also stems from the United States’ economic strength and the its stability in international market, making it the preferred currency for international transactions. Nevertheless, geopolitical upheavals such as US sanctions and economic uncertainties, have influenced a global movement towards de-dollarization - reducing dependency on the dollar in favor of alternatives like the Euro, Chinese Yuan, or domestic currencies. This opens up the de-dollarization as an easy yet entangled possibility to India, an emerging country with encompassing economic power. Although India has not taken any direct steps to weaken the dollar as the global reserve currency, its moves to encourage the trading of Indian Rupees and bilateral currency agreements, among others, hold the indication that it is taking a practical step towards the diversification of its financial consumerism.

The Global Push for De-Dollarization

De-dollarization is motivated by the need to eliminate the dangers involved in the dominance of the dollar. The geopolitical occurrence like tariffs imposed by the US under the Trump Administration to numerous countries including India, China, and Bangladesh, as well as continuous sanctions imposed on countries like Russia and Iran, have demonstrated the level of vulnerability of using a single currency controlled by one nation. The Euro, holding 20.06% of global reserves, is a strong contender, particularly in European trade. The Chinese Yuan is accruing popularity and particularly in Asia where it has been used in other transactions such as India’s import of coal from Russia. Local currency trade, through settlements in Indian Rupees or UAE Dirhams, has been facilitated via bilateral agreements. Several other proposals to the dollar system have already been made elsewhere. El Salvador is one example, as it tried to incorporate cryptocurrencies into its national economy, but because of little acceptance of the assets in other countries, they are rather inappropriate in terms of cross-border transactions. Multilateral efforts have also taken momentum, with the mBridge project being a first through which BRICS and other countries join around the implementation of Central Bank Digital Currencies and other options that break with a strict dollar-only settlement system.

India’s Nuanced Stance

Indian approach towards de-dollarization is a cautiously active approach, which continues to balance the pragmatic approach of economic interests and long-range strategic positioning. External Affairs Minister S. Jaishankar has also emphasized that de-dollarization is not part of India’s policy, reflecting that India need to have strong relations with the US, who is a key trading partner. Nevertheless, the Reserve Bank of India (RBI) has stepped up to minimize the dollar dependency. As of 2025, banks from 30 countries, including Russia, Malaysia, and the UAE, are authorized to open Special Vostro Rupee Accounts for Rupee-based trade. 

Settlements in local currencies to promote bilateral trade have been enhanced by agreements with the UAE and Indonesia. As an example, the trade between India and the UAE has undergone significant growth ever since the introduction of the Comprehensive Economic Partnership Agreement (CEPA) in 2022 and reached approximately $83.6 billion in FY 2023-24. Local currency banking through currency swap agreements such as the $75 billion deal with Japan and a $400 million swap with the Maldives under the SAARC framework further eases local currency comfort. The joining of BRICS discussions on developing other financial systems is another indicator that India is willing to be de-dollarized, but the country is cautious not to do anything that would cause friction with the US.

Benefits & Challenges for India

There are a few strategic and economic benefits of de-dollarization for India as well. The local currency trading eliminates exposure to dollar fluctuations thereby stabilizing expenses of exporters and importers. For instance, fluctuations in the dollar’s value can disrupt India’s import bills, particularly for oil and gas, which account for a significant portion of its trade. Bypassing dollar conversions minimizes transaction costs, benefiting small and medium enterprises, the backbone of India’s economy. Decreasing dependence on the dollar increases the monetary autonomy of India, removing it against the spillover effects of actions of the US Federal Reserve, including an increase in the interest rates. Diversifying reserves with assets like the Euro or gold hedges against dollar-specific risks. Trade of local currency also develops better economic relations with potential emerging markets in South America, Africa, and Asia, developing new trade and investment opportunities.

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Though it is promising, de-dollarization poses significant challenged. Smaller currencies like Indian Rupee might not be as stable and liquid as the dollar, increasing trade volatility risks. The universal acceptability of the dollar makes it unsurpassable in huge transactions. The move to abandon the dollars might negatively influence the relations between India and the US, especially considering the President Donald Trump warnings to impose tariffs on the nations aiming to de-dollarize. Some analysts caution that de-dollarization might unintentionally strengthen the Chinese Yuan, undermining India’s strategic interests given regional tensions with China. Creating a balance between these kinds of risks needs a cautious act in order to maintain the economy and geopolitical status of India.

Way Ahead

There is an ongoing strategic action to the reversal of the US dollar reliance of India. Diversifying trade in Rupee, negotiating currency-swap arrangements and being active in the BRICS organizations, India is on a gradual path of reducing its dependence on the dollar as it also ensures that its position with the United States is not affected. This trend is an indication that India does not plan to move out of the dollar network completely but to diversify it-based financial alternatives. Despite the fact that (and most prominently) the hegemony of the dollar, a comparatively slight international demand to the Rupee, and a persistence of geopolitical ambiguities continue to stand in its path, India could certainly attain practical gains as an outcome of its cautious approach, as de-dollarization. Supplementary benefits offered by it include reduced transaction costs, better system-shock resistance and increased ability to impact, as opposed to simply being impacted by, the emergent global financial architecture.

Author: Amrita Pradhan, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

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