The long-standing dominance of the US Dollar in the global financial system is showing signs of gradual erosion, prompting nations worldwide, including India, to reassess their reliance on the greenback. Data indicates a steady decline in the US Dollar's share of global central bank reserves, from 62.9% in 2010 to a projected 56.3% by 2025. This evolving landscape has spurred India to vigorously pursue the internationalisation of its own currency, the Rupee, marking a significant strategic shift with far-reaching implications for the Indian economy.

While the US Dollar remains the most dominant currency, used in an overwhelming 88% to 90% of all foreign exchange transactions, the trend towards diversification is undeniable. Geopolitical shifts, the weaponisation of sanctions, and a desire for greater financial autonomy are key drivers behind this global de-dollarisation movement.

India's Strategic Push for Rupee Internationalisation

India has been at the forefront of efforts to reduce dollar dependence, aligning with a broader initiative among BRICS nations to promote local currency usage in trade and financial transactions. The Reserve Bank of India (RBI) has rolled out several significant measures to accelerate the Rupee's global acceptance:

• Facilitating Rupee-Denominated Loans: Indian banks are now permitted to extend rupee-denominated loans to non-residents in neighbouring countries like Bhutan, Nepal, and Sri Lanka for cross-border trade. This initiative is expected to significantly boost rupee-based trade agreements, particularly in the South Asian region, which accounted for almost $25 billion of India's exports in 2024-2025.
• Establishing Reference Rates: The RBI plans to create transparent reference exchange rates for currencies of India's major trading partners, aiming to streamline rupee-based transactions and reduce reliance on intermediary currencies.
• Expanding Vostro Account Usage: Foreign entities are now allowed to invest surplus rupee balances held in their special Vostro accounts into Indian corporate bonds and commercial papers. This expands the permitted uses for these funds, making rupee holdings more attractive for foreign banks.
• Liberalising FEMA Regulations: Recent liberalisation of Foreign Exchange Management Act (FEMA) regulations in 1999 aims to encourage the use of the Indian Rupee for settling cross-border transactions.
• Bilateral Currency Agreements: India has signed Memoranda of Understanding (MoUs) with central banks of the United Arab Emirates, Indonesia, and Maldives to encourage cross-border transactions in local currencies, including the Indian Rupee.
• Internationalising Digital Payments: India's Unified Payments Interface (UPI) has seen international adoption in countries like Singapore, France, UAE, Sri Lanka, Bhutan, Mauritius, and Nepal, further enhancing the Rupee's digital footprint.

These steps are part of a continuous process, with the RBI's Strategic Action Plan for 2024-25 specifically outlining goals to promote INR internationalisation.

Impact on the Indian Economy

The internationalisation of the Rupee presents a mixed bag of opportunities and challenges for India.

Opportunities:

• Enhanced Economic Stability: Reducing dependence on the US Dollar can shield the Indian economy from sudden exchange rate fluctuations and currency crises, fostering greater stability.
• Monetary Policy Autonomy: Increased use of the Rupee in international trade grants India greater control over its monetary policy, allowing it to manage inflation and interest rates more independently.
• Reduced Forex Reserves Requirement: A stronger international Rupee could lessen the need for India to maintain large foreign exchange reserves in convertible currencies.
• Lower Import Costs: A stronger Rupee due to international demand can help mitigate import costs, particularly for dollar-denominated commodities like crude oil, potentially curbing domestic inflation.
• Boost to Trade and Investment: Facilitating trade in local currencies can reduce transaction costs and exchange rate risks for Indian businesses, promoting exports and attracting foreign investment.

Challenges:

• Rupee Volatility: Despite efforts, the Indian Rupee has shown volatility, depreciating against the US Dollar over the past five years. This instability can pose risks for countries accepting rupee settlements.
• Foreign Investor Sentiment: A rapid shift away from the dollar could potentially deter some foreign investors who prefer the stability of dollar-denominated assets.
• "Exported Inflation": Some financial experts argue that the US's aggressive dollar printing practices can "export inflation" globally, disproportionately affecting weaker fiat currencies like the Indian Rupee. This dynamic makes the Rupee's internationalisation journey more complex.
• Diversification Risks: While diversifying reserves is beneficial, alternative currencies or assets like gold also carry their own risks, such as depreciation or price fluctuations.

Global Trends and India's Position

Globally, central banks are increasingly diversifying their reserves. India, for instance, has reduced its US Treasury holdings to $227 billion as of mid-Q3 2025, down from $242 billion last year, and simultaneously increased its gold reserves by over 39 metric tonnes, reaching nearly 880 tonnes. This move aligns with a broader trend among central banks to hedge against US fiscal risks and currency volatility.

While the US Dollar's dominance is eroding gradually rather than facing an immediate replacement, India's proactive measures are positioning the Rupee for a more prominent role in the evolving multipolar global financial system. The central bank's recent announcements underscore India's commitment to making the Rupee a reliable and widely used medium for global trade, enhancing its economic sovereignty and strategic autonomy.

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