Dedollarisation and India.

[sanjaykumar]

I hope those who are financially literate can use this space to track what seems to be a movement to avoid the dollar in international commerce.


Perhaps a primer on the global financial system and the importance of the dollar, present and future, can be given first.

I can get around much information but finance seems to be incomprehensible.

[NRao]

It was started some time ago and is accelerating, but not moving fast enough to make any waves for a while (a decade), but it is a great excuse to wage war.

It is an issue of technologies, which most nations do not have as yet. And, those who do have to come to some agreements and then propagate those technologies.

[yensoy]

There are 2 aspects which are somewhat related but distinct, and often get confused:
1. Dollar as a payment/settlement currency and
2. Dollar as a reserve currency

The general idea these days is to settle payments in local or other non-dollar currency. There are some benefits - one is avoiding use of SWIFT system which is controlled by the US and can be sanctioned. The other idea is that local currency settlements will cause a general pull towards trade equilibrium, because neither side wants to accumulate large volumes of currency of the counterparty at this stage. These are certainly good outcomes but need to be more than balanced by the inconvenience of switching to local currency trade in a regime dominated by USD.

As for the reserve currency status, my belief is that every country must invest primarily in itself rather than subsidizing the US economy and inflation print. It is true that the US trade deficit is the reason the USD is king. There is no way for Chinese Yuan for instance to be in the same league when China can only net-net absorb Yuan, not release it, due to their trade surplus. When we have more currencies step up, it might be advantageous to have a large basket of mid-tier currencies including those of the larger ASEAN countries, GCC countries, Latam countries, Korea, South Africa in addition to the usuals as a reserve, where USD is dialed down to about 25%. But since not all these currencies can be freely traded, India, for instance, could build up this basket by purchasing Nostro holdings in Indian banks, for release when necessary.

The problem is that instead of dealing with the ups and downs of one currency, we will have to deal with all the idiosyncrasies of a dozen or more, the potential of damage due to political events or reckless economic policies. If the private sector could be roped in - say a private sector bank specializing in Malaysian Ringit with subject matter experts, branches in Malaysia and import/export customers - that could be a way forward.

[NRao]

Lena Petrova is a great resource (since her YT videos are really short and she does respond to comments). Another resource I have found helpful is Michelle Makori (of Kitco.com) She has very interesting guests on YT, most of whom have been warning about such events for a decade now.

Meanwhile, try this 70 min video. A lot of nuggets, but it does assume a viewer knows something about the subject matter. He does mention "India" and "BRICS" which hopefully will address some of your questions.

[sanjaykumar]

Thanks that was informative. Obviously BRICS is being made out to be a threat, especially if Saudi Arabia joins. Interesting times.

[williams]

IMHO Dollar as a trading currency will have to be displaced first. And as long as we are dreaming, I would like INR to be that alternative currency. Otherwise, why even discuss this? The trading partners must agree to exchange goods in certain currencies. Why do they tend to use the dollar as the primary currency? It is mainly because the dollar value remains more stable than other currencies. The primary factor that keeps the currency value stable is US GDP (there are other factors). A lot of us can talk about growth rate, but the US GDP of ~20 trillion dollars (at constant price) is growing at a reasonable rate from the 60s from a good base value. And despite all issues the US can be attributed to, we have to give them the credit that they've backed their economy with constant innovation and decent production.

On the other hand, the Chinese have made great strides but still need to catch up in innovation. I am not bringing the EU & Japan here to keep the conversation simple. Other countries, including Russia, do not matter if we are thinking about the depth of the economies.

Your currency cannot be stable if it is not backed by a robust economy that constantly shifts the supply curve through technology and the demand curve through human development. So for any trading partner across the globe to agree to exchange goods in another currency, they should have trust in that currency's stability. India is poised with that potential if she can continue the current trend, but there is a long way to go. The first step should be to reverse the direction of INRs value loss. You can only do that once you get your trade deficit, fiscal deficit, and inflation in a downward trend while continuing with the growth rate.

We made an excellent downward trend on trade deficit starting around 2013, but things picked post-Covid. Our fiscal deficit was the lowest in 2018 (about 3.5%) but shot up during Covid and stabilized at 6.9%. Now we had some envious success. But we cannot constantly be the world's 5th country to achieve something and then think we can displace the dollar. We should consider being the world's first country to achieve many more things. Covid vaccination drive demonstrated something envious, but such a trend should continue in other areas, especially manufacturing and product development. To compare, India's manufacturing output of 430 billion is excellent but compare that with 2.4 trillion in the US and 3.8 trillion in China. You can only expect more demand for INR if we change the fundamental economic structure. And if there is less demand for INR, why would a trader think to trade in INR?

When the dominant trading currency is displaced, world central banks will start looking for a different reserve currency. Only then will it be easier to displace the dollar.

[RoyG]

Displacement and replacement are occuring at the same time. It's not a sequential process.

[tandav]

What are the emerging opportunities in this trend towards dedollarization.

How can individuals 1) benefit from some investments 2) indemnify/insure themselves against potential blowbacks

[A Deshmukh]

Can we have a serious thought to Dedollarisation and its impact on India/Indians:

Scenario 1) Dollar depreciates slowly by 10% per year

Scenario 2) Dollar collapses by 50% or more in one year

what effect will it have on India and Indians:
1) IT industry
2) Import dependent industries and other Export industries
3) Indian real estate industry
4) Impact on agriculture and other local industries
5) Impact on Indian stock market
6) Value of Gold
7) Impact on Petroleum prices
Impact on Indian Defence sector / imports/exports
9) Consequent Inflation/Depression in US and consequences and its impact on India
10) Currency wars in the world / world war 3

[williams]

Can we have a serious thought to Dedollarisation and its impact on India/Indians:

Scenario 1) Dollar depreciates slowly by 10% per year

Scenario 2) Dollar collapses by 50% or more in one year

what effect will it have on India and Indians:
1) IT industry
2) Import dependent industries and other Export industries
3) Indian real estate industry
4) Impact on agriculture and other local industries
5) Impact on Indian stock market
6) Value of Gold
7) Impact on Petroleum prices
Impact on Indian Defence sector / imports/exports
9) Consequent Inflation/Depression in US and consequences and its impact on India
10) Currency wars in the world / world war 3

If the US dollar were to collapse by 50% in a year, it would have a significant impact on the Indian IT industry, as the industry is heavily dependent on US clients and US dollars for revenue.

Firstly, the cost of IT services for US clients would increase significantly, as Indian IT companies would need to charge more in order to make up for the loss in value of the US dollar. This could lead to a decrease in demand for Indian IT services, as US clients might look to cheaper alternatives in other countries or reduce their IT spending altogether.

Secondly, Indian IT companies would face challenges in accessing US dollar funding for their operations. Many Indian IT companies borrow in US dollars to fund their operations and growth initiatives, and a collapse in the value of the US dollar could make it difficult for them to repay their debt and obtain new funding. This could impact their ability to invest in research and development, acquire new companies, or hire new employees.

Overall, a collapse in the value of the US dollar would be a significant challenge for the Indian IT industry and would require companies to adapt quickly to new market conditions in order to remain competitive. We are talking about a 50 billion-dollar market here.

If it is a slower transition, which is a more likely scenario, then there will be a moderate impact, and maybe the industry could absorb it, especially since the impact will be the same for other IT service exporting countries. To summarize, any de-dollarization policy needs to be taken in small baby steps to make sure we don't impact US-dependent industries to face a sudden shock.

[sanjaykumar]

Will China dump US treasury bills and cause a singularity like collapse of the dollar. By flooding the market with now low value dollars.

[V_Raman]

I have no doubt India will pick up treasury buying if China resorts to any kind of dumping too fast. I dont think India can afford a USD that is losing value too fast. That will be a sure way of making India openly side with USA - China will not do that.

The implications of India being a neutral balancing power will be interesting. neither side wants to force India to pick. We are the true super power

[Vayutuvan]

@sanjaykumar hakim, Cheens can’t crash the market all by themselves. They will lose a lot of moolah. UStreasury bills are still the only game in the market.

[nandakumar]

@sanjaykumar hakim, Cheens can’t crash the market all by themselves. They will lose a lot of moolah. UStreasury bills are still the only game in the market.

Absolutely. Dollar is not just used for setting international trade in commodities and services, it is also used as a store of international private and sovereign savings with the latter only a fraction of the total private savings. The total corpus of Norway Sovereign Wealth Fund would be less than what US receives as private capital in a quarter. Now, where would this annual flow of private savings go? Not to China whose economy is large enough to absorb. But China has scant regard for sanctity of private wealth. There aren't any other games in the town!

[williams]

Will China dump US treasury bills and cause a singularity like collapse of the dollar. By flooding the market with now low value dollars.

It is a deadly embrace for China to put it lightly. Let me give you a simple scenario. Let us say there is a potter named "Ching" and a rich lazy guy named "Sam". Sam asked Ching for pots and Ching was ready to exchange a lot of pots. However Sam did not have much to give, so he gave back, let us say some rice bags, and also wrote some promissory notes saying he will repay the rest later with interest. Now over time, these promissory notes are what Ching owns (a trillion of them). Now suddenly Ching says hey give me more rice bags for the notes I have or I will not provide you with pots anymore. Now surely the value of rice is going to go down because Sam is not getting pots anymore. So now Sam thinks that he needs to make his own pot. The moment Sam makes his own pots, he does not care much to produce rice to get pots from Ching. And all Ching is left with is a bunch of toilet paper and unsold pots

So the moment China dumps the treasury bills, Chinese goods are going to be more expensive. Khan needs to look for cheaper sources or even start to bring back manufacturing to the mainland. The moment that happens, there will be a great exodus of investors from China and there will be no market for the now-expensive Chinese goods. The only hope China had was to take that promissory notes and lend them to other poor fellows who then work to provide whatever China wants and the poor fellows will now have toilet paper. This scheme is called BRI! But unfortunately, the poor fellows seem to be more like Pakis who like to either produce suicide bombs or strong stuff to smoke. Whatever toilet paper was lent is gone and nothing is coming back that is of value to the Chinese. On top of it, banyas like India and Vietnam not only refused to borrow toilet paper but are willing to supply the same goods to Uncle Sam and his stooges in Eirope for lesser things in exchange.

The issue is China is not producing anything that others cannot produce. Everyone has the technology, skill, and even the raw materials to do it. If you follow this logic, it does give you the thought somewhere in the corner of your brain. Perhaps Xi's gang, lab-leaked a deadly virus to either go for a great reset or maybe revenge. Whatever that is, it is not working as they expected, and the great exodus has already started. This Ukraine war is a distraction, but it will come to an end, once Khan dumps off his old equipment in the name of protecting the weak, he will dump Ukraine and move on to milk the next innovations his citizens are ready to produce.

The question is for all the money China got from the West, where is the innovation and cutting-edge technology that countries like Japan produced? Where is the Chinese version of Toyotas and Hondas? The answer lies in China's lack of an open society. When people move freely to express their opinion, they invent things to solve their everyday problems instead of making cheap copies of other people's innovative products. Investing in human capital does not mean creating robots with Ph.D. degrees. It means to let people think freely, experiment, fail, and innovate. These guys don't have respect for other human beings because their idea of a human being is a controlled robot that needs to be charged to do their work. Controlling people instead of inspiring them is never going to work in any organization or country.

[Cyrano]

Good post !

India is on a rising trend, we are able to take good advantage of TODAY's global economic system (however fair or unfair one may consider it to be) to import what we need, and export what we can. If we are able to grow faster than other countries, it points to the abilities India has acquired to play better in the current system and keep improving.

By that I mean, improve basic necessities for its people, ie food security, water, power, infrastructure, public services, roads, rail and air connectivity, military capability to deter adversaries, surplus wealth to help neighbours and friends in need to improve its own positioning etc.. Though lots of strides have been made in the past few decades and strong acceleration since 2014, our population has increased too and we still have a long way to go.

A sudden and significant loss of dollar's value will be IMO more than a nuisance factor. India will need to make a considerable effort to rejig and rewire its policies and postures in many areas, perhaps we can take advantage of some of the impacts, and we may suffer due to others. It will feel like rules being changed mid way while we are winning a game of cricket, 15 overs left and 100 runs needed with 6 wickets in hand, but power play rules are changed and every fielder can be on the boundary, in case of a run out, bother batsmen need to go.

There is no NEED for India to wish for such an event to occur in this decade. If it does occur despite everything, todays Indian leadership is quite capable of navigating through it in the economic sphere.

But what will be more unpredictable is US' reaction to such an event, and like they say when all you've got is a hammer, everything looks like a nail. Will the power of the dollar affected, all that US will have left in terms of power projection will be its huge military capability with global reach. Inevitably, it will try to get out of the hole by pursuing aggressive military actions that will destabilise the whole system further, and we will enter into very unpredictable territory. India will be able to deal with it much better in the 2030s than it can today.

[williams]

This Article provides some thought on the Indian perspective of de-dollarization

https://www.linkedin.com/pulse/dedollar ... vivek-irs/

The "exorbitant privilege" afforded to the US allows it to maintain large current account deficits and accumulate significant amounts of debt, which can contribute to global imbalances and economic instability.

Remember this debt is used to build a large MIC and maintain large power projection capabilities with a huge defense budget.

Some countries, like China and Russia, have sought to diminish the influence of the US dollar as a means of countering perceived American hegemony and mitigating the impact of US sanctions.

Other countries, particularly those in the Eurozone, have pursued de-dollarisation to promote the international use of their currency, the euro, in a bid to enhance their global economic standing and secure greater financial autonomy.

Secondly, creating a viable alternative to the US dollar presents a formidable challenge. To achieve the requisite degree of stability, liquidity, and acceptability, an alternative reserve currency must be underpinned by a robust economy, deep and liquid financial markets, and sound monetary and fiscal policy frameworks.

However, fostering a multicurrency reserve system may alleviate some of the risks associated with reliance on a single dominant currency while providing the benefits of diversification.

Furthermore, the internationalization of currencies may heighten competitive pressures in global financial markets, potentially leading to currency wars or beggar-thy-neighbor policies.

[sanjaykumar]

Great comprehensive overview. Good there competent people in GoI.

[Cyrano]

Interesting discussion, some of it made sense to me, but some of it seems like blind leading the blind. But definitely worth a listen

[Guddu]

If you are not discussing Bitcoin, you are only getting part of the de-dollarization story. One needs to discuss de-dollarization, proposed BRICS currency and Bitcoin and CBDC (eRupee) together to get the complete picture.

[drnayar]

Are we discussing alternative currencies like that for the BRICS ? India seems not too keen on it presumably because of Chinese dominance

[SBajwa]

As long as US is the brain of the innovative technology in world de-dollarization, etc will not happen. Most people doing technical research in USA are Indians or "Free Chinese" these days. The amount of money that goes in R&D is USA (education sector in Public, private universities as well as private sector) is much more than other countries (absolute dollars as well as other parameters like per capita).

[VKumar]

One importer I know tries to avoid USD as far as possible. Paying in EURO and UKP, AUD, CAD, NZD. Never does business with China so no yuan.

[Guddu]

One importer I know tries to avoid USD as far as possible. Paying in EURO and UKP, AUD, CAD, NZD. Never does business with China so no yuan.

This is the main issue, what really matters in the final analysis, is the currency you decide to hold your "wealth" in. Most people will trade in whatever currency, but the final wealth is usually held in US $. That is why the US $ is king, atleast for the next several years.