Context:
RBI Governor Shaktikanta Das explained India’s stand on de-dollarisation after US president-elect Donald Trump’s warning to BRICS nations.
De-Dollarisation:
- Process of reducing reliance on the US dollar in international trade and financial transactions.
- Objective – To mitigate risks associated with currency volatility
- Merits –
- Reduction of Exchange Rate Risk: Trading in local currencies minimizes the risks associated with fluctuations in the US dollar’s value.
- Enhanced Monetary Policy Control: Countries can implement strategies suitable to their economic conditions without being influenced by the US dollar.
- Geopolitical Benefits: Shifts the balance of power, challenging US dominance and its weaponisation of the dollar through sanctions.
- Demerits –
- Affect Financial Transactions: Many commodities, like oil and gold, are currently priced and exchanged in dollars.
- Financial Instability: Abruptly abandoning the dollar might expose domestic currencies to risks like fluctuating exchange rates and expensive debts.
- Limited Global Acceptance: Alternative currencies may face challenges in gaining widespread acceptance.
- Related initiatives by India –
- Local Currency Trade Agreements: India has signed agreements with select nations for bilateral trade in local currencies, reducing transaction costs and exchange rate volatility.
- Diversification of Forex Reserves: Increased focus on gold and other currencies in reserves.
- Promoting INR Trade: Steps to internationalize the Indian rupee (Rupeefication) for global trade settlements.
- Nostro and Vostro Accounts: Enable banks to hold and manage funds in different currencies, facilitating trade in local currencies instead of the US dollar.
Nostro and Vostro Accounts:
- A Nostro account is an account that a bank holds in a foreign bank in the foreign currency.
- Example – Imagine Bank A in India wants to do business in the US. It opens a Nostro account in a US bank (Bank B) in US dollars. This account helps Bank A manage its money in the US.
- A Vostro account is an account that a foreign bank holds in a domestic bank in the domestic currency.
- Example – Using the same banks, Bank B in the US opens a Vostro account in Bank A in India, but in Indian Rupees. This account helps Bank B manage its money in India.
- In simple terms, a Nostro account is “our money in your bank,” and a Vostro account is “your money in our bank.”
Source: Business Standard
Previous Year Question
Consider the following statements:
Statement-I : If the United States of America (USA) were to default on its debt, holders of US Treasury Bonds will not be able to exercise their claims to receive payment.
Statement-II : The USA Government debt is not backed by any hard assets, but only by the faith of the Government.
Which one of the following is correct in respect of the above statements ?
[UPSC Civil Service Exam – 2024 Prelims]
(a) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
(b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
(c) Statement-I is correct, but Statement-II is incorrect
(d) Statement-I is incorrect, but Statement-II is correct
Answer: (a)
