Editor's note: C. Saratchand is a professor at the Department of Economics, Satyawati College at the University of Delhi in India. The article reflects the author's opinions and not necessarily the views of CGTN.

On July 11, 2022, the Reserve Bank of India unveiled a circular involving legal directions on International Trade Settlement in Indian rupees. It ostensibly seeks to bolster exports from India and to enhance interest of international wealth holders in Indian rupee denominated assets. At one level, this policy initiative has a partial resemblance to some past trade arrangements prior to the "unipolar moment" that began in 1991.

Let us examine the trade dimension to begin with. Both exports from and imports into India under this policy will be denominated in Indian rupees. The exchange rate that will be used in such trades will be "market determined." Foreign banks of trade partner countries of India are supposed to open vostro accounts in authorized Indian banks (subject to the requisite permissions from the Reserve Bank of India). Indian importers will be required to transfer funds in Indian rupees which would be credited into these vostro accounts. Indian exporters will be paid in Indian rupees out of funds that are available in these vostro accounts.  

The background to this policy move is three fold. First, the U.S. and its "allies" unleashed an economic war on Russia through a wide ranging raft of unilateral sanctions. Since Russia is an inalienable trade partner for countries such as India, it had become necessary to devise alternative channels for financing of trade among these countries. Second, firms in India and Russia have already used alternatives to the dollar to carry out trade. Third, in the past, the government of India had broken off some trade relations with countries such as Iran and Venezuela in order to demonstrate "compliance" with unilateral sanctions of the U.S. The strategic concord between BRICS countries that has endured, even after the current round of unilateral sanctions by the U.S., has expectedly enhanced the strategic autonomy of all countries including India. This has enabled countries like India to unveil policies such as the present one on Indian rupee-based foreign trade.

The strategic autonomy of countries is also furthered by the fact that the U.S. is neither an overwhelmingly significant importer nor an exporter in terms of the magnitude of world trade or in terms of most product categories.

But a disproportionately large share of international trade, investment and finance is denominated in U.S. dollars. This reserve currency status of the U.S. dollar arose on account of the confidence of wealth holders that the U.S. government can ensure that: first, the U.S. dollar prices of key commodities (such as oil, natural gas, etc.) will neither rise or fall monotonically; second, the bulk of world trade in commodities will be carried out in terms of the U.S. dollar; third, many net exporters of commodities will use their proceeds to directly or indirectly (through U.S. banks) buy U.S. government securities.

These three factors were both causes and consequences of each other. It also enabled the U.S. government to effectively impose unilateral sanctions on most countries of the world with the exception of some BRICS countries.

However, the "unintended" fallout of the economic war on Russia, on top of the COVID-19 pandemic has undermined to varying degrees these three reasons of the U.S. dollar's reserve currency status. Also, the share of the U.S. in world economic activity (in terms of output and technology besides trade) has been falling.

Besides, the gratuitous appropriation of approximately half of the foreign exchange reserves of the Russian Federation by the U.S. and its "allies" has reduced the confidence of other central banks and wealth holders in the inviolability of U.S. dollar denominated assets, such as U.S. government securities. 

Therefore, other central banks and wealth holders are likely to seek to diversify their wealth holdings towards assets denominated in currencies other than the U.S. dollar.

In this light, the current policy initiative by the Reserve Bank of India and similar moves elsewhere are likely to work towards decreasing the role of the U.S. dollar as the reserve currency of the world.  Realizing the adverse consequences of these trends, the U.S. government has been compelled to "allow" certain transactions involving Russia and other countries ostensibly for "humanitarian" reasons.

After all, it is politically impossible for the U.S. to effectively sanction all or most other countries of the world. Any attempt to do so now will only result in the isolation of the U.S. economy.

However, attempts to conduct trade in currencies other than the U.S. dollar can be viable only if the countries participating in the quest for an alternative are willing to institute capital controls. In the absence of capital controls, volatile flows of foreign institutional investment will dominate the flows of foreign direct investment, foreign trade and government to government lending. But, the attempts to develop alternatives to the U.S. dollar are likely to be more sustainable if they are centered on any bloc such as the BRICS.

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