When the rupee fell to an all-time low on Monday, trading below Rs 95 to the dollar, commodity traders and fund managers panicked. Energy flows, which are traditionally priced in dollars, were getting costlier by the hour.
Not only was the benchmark Brent crude selling at more than USD 116 to the barrel, but the rupee outflow spent to buy dollars was also rising.
The question looming on their minds, as well as those of policy-makers, was how long they could bear the market heat? The other big debate on forex and commodity trading floors was whether it would make more sense to slowly move away from using the petro-dollar pricing system towards a broader basket of currencies.
“If things get worse in the Persian Gulf, the rupee, which has fallen by about 30 per cent in the last years, can well cross Rs 100 to the dollar,” said Raman Chadha, a merchant banker who specializes in representing Gulf-based funds.
Since the 1970s, the global financial system has orbited around the greenback or the United States dollar.
Today, while the dollar still reigns supreme, there are other options. Some 22 countries officially trade part of whatever they buy or sell to India in rupees. These include, besides Iran, Nepal, Bhutan, Sri Lanka, and Russia, countries like Tanzania, Kenya, Malaysia, Myanmar, and even the UK and Germany.
The shift underway is less a revolution than a slow recalibration, shaped as much by geopolitics as by economics. And the wars in West Asia may prove to be an accelerator, not a turning point.
The idea of “de-dollarisation” has become a catchall for a range of developments that, taken together, suggest a more fragmented monetary order.
Across emerging markets, countries are experimenting with alternatives that include settling trade in local currencies, building digital payment systems, and, in some cases, explicitly seeking insulation from Western financial power.
“In a sense, what is happening is something which India was used to till the first big devaluation of the rupee in 1966 by 57 per cent. The Indian rupee, which was pegged to the pound sterling and was acceptable tender in most Gulf states and in East Africa,” pointed out Prof Biswajit Dhar, former WTO Chair at Indian Institute of Foreign Trade.
However, the US dollar still accounts for the majority of global foreign-exchange reserves and dominates trade invoicing, especially in commodities.
Its strength lies not only in inertia but in the unmatched depth of American financial markets, the liquidity of dollar-denominated assets, and the legal and institutional frameworks that underpin them.
In recent years, bilateral trade arrangements have increasingly bypassed the dollar, with Russia and China conducting a growing share of their commerce in Renminbi and Roubles.
India has explored rupee-based settlement mechanisms with partners facing dollar constraints. Brazil and Argentina, too, have discussed similar frameworks.
However, none of them can as yet match the US dollar.
“Renminbi, which too is now an increasingly acceptable currency in foreign trade and certainly more acceptable than the rupee, is way behind, as is even the better off Euro and Yen,” said Dhar.
Attempts to create alternative settlement systems that do not rely on the Western-dominated inter-bank settlement (SWIFT) system or correspondent banking chains have as yet not been successful.
The principal reason is that they do not yet replicate the dollar system’s core advantage, which is the ability to move vast sums quickly and predictably across borders with minimal friction.
However, the renewed volatility in West Asia has sharpened the political dimension of global finance.
For energy exporters in the Gulf, as well as for major importers in Asia, the conflict has revived the fear of risks of over-dependence on a financial system anchored in a single currency.
The petrodollar system, under which oil is predominantly priced and traded in dollars, has long tied energy markets to American financial hegemony.
There is growing interest in invoicing oil in alternative currencies, or in using hybrid arrangements that reduce exposure to dollar clearing. Digital currencies, particularly state-backed ones, are also being explored as a way to bypass traditional channels that can be disrupted by sanctions or geopolitical pressure.
“However, no one can really predict whether this war will result in de-dollarisation. The end game could be agreements which see deals which ensure that crude continues to be priced in dollars instead of an acceleration in the moves away from the dollar,” said Vice Admiral Shekhar Sinha, chairman of the board of trustees at India Foundation.
Admiral Sinha’s views are echoed by many other analysts.
The Gulf economies remain deeply integrated with dollar markets, and their currencies remain pegged to the dollar. Sovereign wealth funds and central banks across the region continue to hold substantial dollar reserves. A wholesale break would be economically disruptive and politically risky for the entire region.
Instead, what may emerge is a strategy of diversification, an effort to build “insurance” against geopolitical shocks without abandoning the existing system.