The fall of the US dollar's significance led countries like China and Russia to adopt alternatives to the dollar. China pressed trade partners, including Russia, to denominate some trade in RMB (renminbi – Chinese currency). It established an RMB trading centre in Hong Kong, Singapore and in Europe and created cross border stock exchange connection programme that denominate some trade and investment in RMB. In 2016, IMF included RMB in IMF SDRs (Special Drawing Rights), with China emerging an important global trading partner.
Following suit, Russia accelerated the de-dollarization move in 2014 when the US imposed sanctions on Russia for annexing Crimea in Ukraine.
First, the central bank of Russia cut its reserves of US dollar by more than half between 2013 and 2020. Second, Russia held several discussions with China, India, Turkey and members of the Eurasian Economic Union (Armenia, Belarus, Kazakhstan and Kyrgyzstan) to give preference for trade in national currencies. In Q4 2020, Russian exports to BRICS, invoiced in US dollar, declined to 10 percent in 2020 from 95 percent in 2013.
Russia developed its own financial transfer system SPFS (System for Transfer of Financial Messages) – to allow US allies to pay for oil and gas in rouble after the US called for Russian banks to be disconnected from SWIFT.
An analysis says that the convertible rupee can gain strength at the behest of de-dollarization. As China – one of the top two trading partners of India - is tending towards de-dollarization and Russia is emerging a major crude oil supplier after the current oil shock, the de-dollarization wave leverages new opportunities for the rupee to be stronger.
A number of benefits can be derived from rupee convertibility. First, the internationalization of the rupee will accelerate exports. Exports become more profitable. This is because as the rupee rate will be decided by the market foreign exchange rate and not by government intervention, the market rate is generally higher than the official exchange rate fixed. Given these, exporters can get more rupees than foreign exchange, for example US dollar, fixed officially before.
Second, rupee invoicing in trade will insulate foreign exchange risks. Import of crude oil is a case in point. Currently, almost the entire import oil is transacted in US dollar. A surge in oil import is due to unprecedented rise in oil prices as well as fluctuation in the US dollar. In 2021-22, India’s import of crude oil increased by 93.5 percent in value term. But in quantity, it increased merely by 7.8 percent.
Third, it will provide incentives to NRIs to go for remittances. Eventually, it helps in increasing foreign exchange reserves.
Days are ahead when the rupee will tend to be fully convertible. Full convertibility means fully capital account convertibility in the balance of payment. It opens the market for foreign investors, businessmen and trade partners. It encourages FDI flow and free flow of capital. Local businesses will have easy access to the foreign capital market for loans comparatively at lower rates.
Nevertheless, there is a catch. The rupee can be eclipsed by global volatility in the currency market. It may also push up foreign debt.
Author: Subrata Majumder
Subrata Majumder is a former adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review.