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Long before “dollar dependency” became a concern in policy circles, the global financial system had already been shaped around it. In 19th century, trade was built on the classical gold standard while the British pound was traded backed by Britain’s colonial might and economic power.

Since the Great Depression, as the world order gave greater significance to the US-led economic management system, that role of a monetary-policy anchor shifted from Britain’s gold standard system to the Bretton woods arrangement created to financialise and popularise the U.S. dollar. US’ post 1945 global foreign policy project was built on a gradual dollarisation of the world-to be adopted by both, the developed and developing system.

But the US dollar didn’t just become an important medium of exchange, it became the backbone of a new financial order, supported by international financial institutions like the IMF and World Bank, reinforced by US Treasury markets and its government backed securities.

Oil, from West Asia to Latin America, which is the world’s most strategic and necessitating commodity-based trading good, has long been priced in dollar, created by the US anchored petro-dollar market, which has sought to link all energy trade directly to American influence.

Amidst the changing geo-political and geo-economic system under Trump, that system may still hold, but the American grip on this is loosening and waning in significance.

Countries around the world are building workarounds, through gold, bilateral trade in other currencies and digital payment alternatives. For India, this shift is about reducing exposure to global turbulences. The lesson is clear, a global finance is not just about efficiency, it’s about power and when that power becomes too concentrated, countries look for ways to rebalance the system.

From the Indian perspective, it entered that system through the back-door context of crisis-managed desperation.

In 1991, as our foreign exchange reserves were getting depleted fast we were forced to pledge gold to survive. What followed was the textbook definition of economic liberalisation but also with that –  financial submission. The Reserve Bank’s independence may have grown, but so too did its dependence on managing capital flows, defending the rupee and building dollar reserves not as an asset of strength but as insurance against exposure.

Over the past three decades, India has amassed a formidable war-chest in forex accumulation, more than $700 billion in foreign exchange........

© The Wire