India’s Rupee Move To Trade With Russia Has Underlying Global De-Dollarization Implications

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India’s Reserve Bank (RBI) has allowed the Rupee to be used in international trade settlements (full story here) in moves generally seen as assisting its trade with Russia, with the US$ and Euro out of reach due to Western sanctions on Moscow.

However, that is not the entire story. India also needs, as Russia has done by insisting on being paid in Rubles, to prop up the Rupee – the Indian currency is at its lowest-ever level against the US dollar and is currently valued at just Rs.80 to the dollar. That equates to a valuation difference of 80-1 whereas the GDP value difference between the two countries is far less than that at about 10-1 – India’s economy was worth US$2.66 trillion in 2021 against the United States US$20.89 trillion.

This in turn implies that the US dollar is both massively over-hyped and over-valued. This divergence also allows the US to buy Indian products far more cheaply – with US imports from India increasing to US$76.11 billion in H1 2022. The US is buying more Indian products – but paying less for them.

So much for Washington’s actual support of its Asian allies.

In terms of Russian Ruble to Indian Rupee, the Ruble is valued at about 1 to 1.37 Rupees, yet India’s GDP is about US$2.66 trillion against Russia’s US$1.4 trillion, creating a value disparity not exactly equal, but certainly far closer than the United States’ whopping 80-1 and 10-1 India divergence.

This means that the current US dollar value has little relevance to actual economic strength. The RBI partially acknowledge this in a statement which read “In order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of the global trading community in INR, (Indian Rupee) it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports / imports in INR.”

Local Indian industry groups have welcomed the passage of the new currency trading mechanism for international trade. A. Sakthivel, President of the Federation of Indian Export Organisations (FIEO) said that “This move will pave the way for trading and settlement of exim (export-import) transactions in Indian rupee. The timely move, at a time when many countries are facing huge forex shortages in Africa and South America, allowing only exim transactions through LC [local currency], will help our exporters and importers.”

The rupee’s use in trade settlement would help the RBI in conserving foreign exchange, and would help save about 16.38% of foreign currency use in Indian trade.

The implication here is not just the issue that India is exploring alternative ways to sustain and grow trade with Russia, but also sees more benefits in using its own currency to trade than it has previously done with the US dollar. Russian analysts themselves have been talking about the “Death of the US Dollar” which while eye-catching is based upon the issue that Russia now also wants payments for its gas supplies to be designated in Rubles and not Dollars. India, in trying to protect its own Rupee currency, is now following similar tactics. China and Russia have been increasing their share of RMB-Ruble trade since 2019 – this has decreased US dollar use to less than 50% of total bilateral trade, with the policy continuing.

That will inevitably increase stress upon the dollar and especially if other currencies start to follow suit and Governments begin to feel they would be better off promoting the use of their own currencies in international trade.

This may take awhile to get China on board in terms of divesting its US$ assets, in which Beijing is caught somewhat between the devil and the deep blue sea as it possesses a huge amount of US$ bonds- it is not to its advantage that the dollar loses value – although it will certainly be looking around for ways fast forward a reduction in these. It has being doing so – Chinese holdings dropped to US$1.003 trillion in April 2022 and it continues to divest, although it has a long way to catch up with Russia, whose US dollar holdings are close to zero.

Other countries that will be considering moves such as Russia and India’s are the BRICS nations, as well as Türkiye which has had plans to de-dollarize since 2018. Has India created an initial few steps to bring about an end to US dollar dominance? While most of the world’s major economies will stick with the dollar, and China remains somewhat stuck due to its exposure, a grouping of countries such as Russia, India, Brazil, Iran, Türkiye, Argentina, Egypt and South Africa have enough GDP power to equate to roughly half of the GDP possessed by the United States.

All have expressed a desire to seek non-dollar trade alternatives and that 50% clout may be enough to develop a secondary phase of other countries doing the same. With China gradually drawing down its reserves, another major prize in doing so would be Indonesia – a trillion-dollar economy in its own right and the largest in ASEAN. These moves could materialise towards the year end or in 2023 – depending upon US strength and the coming wave towards popular support for domestic currencies rather than American.

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