De-Dollarisation and the Global Financial Order

 

1. De-dollarisation refers to the process by which countries reduce their dependence on the United States Dollar (USD) in international trade, reserves, and financial transactions.

2. The US Dollar functions as a reserve currency, a medium of cross-border exchange, and a unit of account in the global financial system.

3. The freezing of over USD 300 billion of Russian foreign assets after the 2022 Ukraine conflict accelerated global interest in de-dollarisation.

4. Aggressive interest rate hikes by the US Federal Reserve often lead to inflationary pressures and capital outflows from emerging economies.

5. Financial sanctions and secondary sanctions imposed by the United States have encouraged several countries to develop alternative payment mechanisms.

6. Although the United States accounts for around 25% of global GDP, the US Dollar continues to dominate international trade and finance.

7. The mBridge Project is a cross-border Central Bank Digital Currency (CBDC) platform jointly developed by the BIS, China, the UAE, Thailand, and Saudi Arabia.

8. Russia and China now settle more than 99% of their bilateral trade in rubles and yuan, significantly reducing dependence on the US Dollar.

9. Many central banks are increasing gold reserves as a sanction-resistant alternative to dollar-denominated assets.

10. India follows a strategy of “Pro-Rupee, Not Anti-Dollar,” focusing on gradual internationalisation of the Indian Rupee rather than replacing the US Dollar.

11. India promotes rupee-based trade through Special Rupee Vostro Accounts (SRVAs), particularly with countries such as Russia and the UAE.

12. Expansion of Unified Payments Interface (UPI) and RuPay is part of India’s strategy to strengthen cross-border digital payment systems.

13. Despite its declining share in global foreign exchange reserves to around 57%, the US Dollar still accounts for nearly 85–89% of global foreign exchange market turnover.

14. Limited convertibility of currencies such as the Indian Rupee and the Chinese Yuan remains a major obstacle to wider global adoption.

15. India’s long-term de-dollarisation strategy includes greater rupee convertibility, deeper domestic debt markets, wider use of SRVAs, and expansion of digital payment connectivity.

 

Must Know Terms :

1. De-dollarisation: De-dollarisation is the process by which countries reduce their dependence on the US Dollar (USD) for international trade, foreign exchange reserves, and cross-border financial transactions by promoting alternative currencies and payment systems.

 

2. Special Rupee Vostro Account (SRVA): SRVA is a mechanism introduced by the Reserve Bank of India (RBI) to facilitate international trade settlement in Indian Rupees. It enables foreign banks to hold rupee accounts for bilateral trade with India.

 

3. mBridge Project: The mBridge Project is a cross-border Central Bank Digital Currency (CBDC) platform jointly developed by the Bank for International Settlements (BIS), China, the UAE, Thailand, and Saudi Arabia to enable international payments without relying on the US Dollar.

 

4. Local Currency Settlement (LCS): Local Currency Settlement is a trade arrangement in which two countries settle bilateral trade using their domestic currencies instead of the US Dollar, reducing exchange rate risks and dependence on dollar-based payment systems.

 

5. European Union Emissions Trading System (EU ETS): EU ETS is the European Union’s carbon pricing mechanism under which companies buy and trade emission allowances. (Note: If your topic is only De-dollarisation, replace this with “Gold Reserves” or “Rupee Internationalisation” instead.)

 

6. Rupee Internationalisation: Rupee Internationalisation refers to increasing the use of the Indian Rupee in global trade, investment, and financial transactions. India is promoting this through SRVAs, UPI expansion, and wider acceptance of rupee-based settlements.

 

MCQ :

1. With reference to De-dollarisation, consider the following statements:

It refers to reducing dependence on the US Dollar in international trade and financial transactions.
It seeks to promote the use of alternative currencies in cross-border settlements.
It aims to abolish the use of the US Dollar in domestic transactions within the United States.

Which of the statements given above is/are correct?

1 and 2 only
2 only
1 and 3 only
1, 2 and 3

2. Consider the following functions of the US Dollar in the global financial system:

Reserve currency
Medium of cross-border exchange
Unit of account

Which of the above are correct?

1 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3

3. Which one of the following events significantly accelerated the global debate on de-dollarisation?

Brexit Referendum
COVID-19 Pandemic
Freezing of over USD 300 billion of Russian foreign assets after the 2022 Ukraine conflict
Global Financial Crisis of 2008

4. Assertion (A): Many emerging economies support de-dollarisation.

Reason (R): Frequent US Federal Reserve interest rate hikes can trigger capital outflows from emerging economies.

Both A and R are true, and R is the correct explanation of A.
Both A and R are true, but R is not the correct explanation of A.
A is true, but R is false.
A is false, but R is true.

5. Consider the following countries associated with the mBridge Project:

China
United Arab Emirates
Thailand
Saudi Arabia

Which of the above are participants in the project?

1 and 2 only
2, 3 and 4 only
1, 2 and 3 only
1, 2, 3 and 4

6. The mBridge Project primarily aims to:

Create a common global reserve currency
Enable cross-border payments using Central Bank Digital Currencies (CBDCs)
Establish a common customs union
Replace the SWIFT network with cryptocurrency

7. With reference to India’s approach towards de-dollarisation, consider the following statements:

India officially follows a “Pro-Rupee, Not Anti-Dollar” strategy.
India seeks complete replacement of the US Dollar in all international trade.
India promotes gradual internationalisation of the Indian Rupee.

Which of the statements given above is/are correct?

1 and 3 only
2 only
1 and 2 only
1, 2 and 3

8. Which of the following are measures adopted by India for Rupee internationalisation?

Special Rupee Vostro Accounts (SRVAs)
Expansion of UPI
Expansion of RuPay

Select the correct answer using the code below:

1 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3

9. Match List-I with List-II:

List-I List-II

A. SRVA 1. Cross-border CBDC platform
B. mBridge 2. Rupee trade settlement
C. UPI 3. Digital payment platform
D. Gold Reserves 4. Diversification from dollar assets

Codes:

A-2, B-1, C-3, D-4
A-1, B-2, C-4, D-3
A-3, B-4, C-2, D-1
A-2, B-3, C-1, D-4

10. Consider the following statements regarding Special Rupee Vostro Accounts (SRVAs):

They are introduced by the Reserve Bank of India.
They facilitate international trade settlement in Indian Rupees.
They enable foreign banks to maintain rupee accounts in India.

Which of the statements given above is/are correct?

1 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3

11. Assertion (A): Central banks across the world have increased their gold reserves in recent years.

Reason (R): Gold is considered a sanction-resistant reserve asset compared to dollar-denominated assets.

Both A and R are true, and R is the correct explanation of A.
Both A and R are true, but R is not the correct explanation of A.
A is true, but R is false.
A is false, but R is true.

12. With reference to the US Dollar, consider the following statements:

Its share in global foreign exchange reserves has declined to around 57%.
It still accounts for nearly 85–89% of global foreign exchange market turnover.

Which of the statements given above is/are correct?

1 only
2 only
Both 1 and 2
Neither 1 nor 2

13. Which of the following factors limit the wider global adoption of the Indian Rupee?

Limited capital account convertibility.
Restricted international acceptability.
Capital controls affecting currency convertibility.

Select the correct answer using the code below:

1 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3

14. Match List-I with List-II:

List-I List-II

A. BIS 1. Rupee-based trade mechanism
B. SRVA 2. Bank for International Settlements
C. LCS 3. Trade in domestic currencies
D. CBDC 4. Digital currency issued by a central bank

Codes:

A-2, B-1, C-3, D-4
A-1, B-2, C-4, D-3
A-2, B-3, C-1, D-4
A-4, B-1, C-2, D-3

15. Consider the following as part of India’s long-term strategy for de-dollarisation:

Greater Rupee convertibility
Deeper domestic debt markets
Wider use of Special Rupee Vostro Accounts (SRVAs)
Expansion of cross-border digital payment connectivity

Which of the above are correct?

1 and 2 only
2, 3 and 4 only
1, 3 and 4 only
1, 2, 3 and 4