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Written by Maxwell Markel
India has attempted to “de-dollarize” its foreign trade by deciding to increase its trade in rupees, amid wider fears, and hopes, of the fall of US dollar hegemony. The US dollar losing its position as a global reserve currency would mark a massive recalibration of the global economy and weaken the impact of US sanctions on states threatening the security of the international system. However, India does not want to leave the dollar system entirely. India’s push towards trading in rupees is being done to avoid the economic cost of trading in dollars, which is necessitating a host of policy initiatives done for essentially domestic economic purposes. Attempting its own rupee trade reveals India’s unique diplomatic and economic conditions as well as the power of the dollar in the global trade system.
India's Diplomatic Position and the Rupee
After the Russian Invasion of Ukraine, Russia was faced with wide-ranging sanctions and isolation from the rest of the global economy. This put countries still wanting to trade with Russia in a difficult bind, as they could either trade in dollars and face intense sanctions too, or cut off a major trading partner. Given its historic links with Russia, India faced this dilemma more than many countries. India also maintains a desire for neutrality between Russia and the United States to benefit from both relationships: aligning themselves with US interests against China, but still getting most of its military equipment from Russia. So India’s strategic non-alignment is an important context to understand the Modi Government's recent moves to “internationalize” rupee trade. By trading in rupees, India can continue to trade with Russia, Iran, and other countries sanctioned by the US, thus maintaining its traditional diplomatic relationships.
As part of this push to avoid trading in the dollar, India hopes to make the rupee on par with other reserve currencies, i.e. a currency held in reserve by banks and business to conduct business in. Therefore India has made moves in recent months to make agreements with its neighbors, from the UAE to Bangladesh, to complete trade agreements in the rupee. This is part of a larger strategy to “disaster-proof” both the Indian economy and other regional economies.
Instead of being vulnerable to US monetary policy, which has recently made the dollar more expensive due to rising interest rates, countries would conduct a degree of their trade in the rupee, while still keeping a reserve of the dollar in case of emergencies. The appetite other countries have for this policy is indicative of the continued power of the US dollar as countries look to diversify their assets, but not leave the dollar system entirely. This geostrategic desire to maintain Indian neutrality, improve its regional economic power, and avoid the drawbacks of a world dominated by the dollar thus explain why India would want to trade in the rupee, but domestic economic incentives have forced India’s hand in this direction.
The Rupee's Woes
However, no amount of dollar-free trade will empower a weak rupee or resolve India’s trade deficit. Since the War in Ukraine, the rupee has fallen by 10% and is one of the worst performing currencies in Asia. This is due to both India’s large trade imbalance weakening the rupee, and the strong US dollar making investors want to invest in the dollar and not riskier regional currencies like the rupee. The Central Bank of India claims that India has a stable deficit, but the knock-on effects of its trade imbalance has weakened, and even undercut, its ability to actually make the rupee a reserve currency.
Part of the rupee’s problems come from its dependence on importing cheap Russian oil. This has widened its trade imbalance, which is undermining the Modi government’s rupee trade push: India might try to avoid dollar trade, but a weak currency undercuts those efforts even among the countries that also want to avoid the dollar. So the Indian government has responded by attempting to promote exports. By increasing exports, the idea is that it will make the rupee more valuable, and thus more countries would want to trade in the rupee, which would boost the currency, offset India’s trade imbalance, and avoid the costly dollar.
This is where the term “disaster-proof” used earlier comes from, as the Indian Commerce Secretary Sunil Barthwal explicitly couched this goal in those terms. To accomplish this goal, the Modi government has undertaken a variety of initiatives. It is racing to complete stalled-out free trade agreements in the hope that countries will buy more Indian products once tariff barriers are decreased, and release a much-delayed Trade Policy paper focused on a targeted investment strategy to boost exports. This multifaceted strategy is all done to boost the rupee so that the policy of trading in rupees and avoiding a strong dollar can be viable in the first place. If the rupee does not strengthen as a currency, then it is unlikely this push to avoid dollar trade will be able to get off the ground.
The Dollar Remains
India and its rupee diplomacy does not desire to displace the dollar, but to decrease the risks associated with dollar dependence. Its efforts to conduct trade in rupees have mostly failed due to the weakness of the rupee itself, but this does not mean that the general project is a failure. India’s rupee trade initiative does provide a sanctions-free trade lifeline to Russia, Iran, and other countries sanctioned by the US. The frequent use of sanctions by the US has created quite a large economic block of countries still needing to trade, and so countries like India aim to exploit this niche. Consequently, this weakens the power of US sanctions and thus the coercive diplomatic power the US can wield to punish global actors, but only by degree.
However, the dollar is still the overwhelming favorite in global trade, so India’s trade with Russia is a lifeline, but not a substitute for lost European and American buyers. Most notably, India has the power in this case: if it doesn’t want to buy Russian oil, Russia won’t have any other customers. This is why the US isn’t exactly angry with India buying so much Russian oil, since Russia is still selling less oil at lower prices than before the Ukraine War. In that respect, the fears that this change in currency trade regime will empower Russian aggression are misplaced.
Yet India’s rupee trade push will be felt regionally. India’s neighbors, from Bangladesh to Sri Lanka, will be most affected by this rupee push. Additionally, they are the most receptive to this strategy given their substantial links to India and their own dollar shortages, so it is likely that the region will see more currency integration. As a result, India’s rupee push will likely empower its regional economic hegemony, and thus increase Indian security commitments in the region to protect its economic partners along with the value of its trade. This raises the stakes for India’s regional competition with China, especially in fragile countries like Sri Lanka and its long-time rival Pakistan. China will likely step up its diplomatic efforts in the region to offset growing Indian influence, which will understandably raise the temperature of its already hot border dispute with India.
In conclusion: India’s recent rupee diplomacy will mostly have regional rather than global implications. Fears about the end of the hegemonic US dollar and the rise of a multipolar currency regime are therefore misplaced. The hegemony of the dollar is so pronounced that recent events that have caused it to strengthen as a currency have caused other countries to react proactively. India has done so by attempting to create the rupee as a reserve currency, but until a time comes when the rupee truly becomes one, India shall remain dependent on the dollar, just as the rest of the world is.
About the author: Maxwell Markel
Maxwell is currently a Master’s Student at Leiden University studying Comparative Politics with a focus on South Asian Politics. He graduated Summa Cum Laude from the College of William and Mary in the United States and is the author of an award winning thesis on Indian State Politics.