The reserve currency status of the dollar scrimps the policy space of other nations
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The recent BRICS summit in New Delhi involved a number of policy discussions, including those concerning the exploration of alternatives to the US Dollar. In spite of the evident disadvantages of over-reliance on one currency for international trade and finance, India is possibly the least forthcoming in exploring alternatives to the US dollar.
How would having multiple international reserve currencies enhance India’s policy sovereignty?
No government whose currency is an international reserve currency would be able to effectively contravene India’s policy sovereignty by denying access to foreign exchange reserves denominated in that currency, since India would be able to use the alternative international reserve currency for international trade and finance.
In fact, the very existence of alternative international reserve currencies would restrain unilateral coercive action by any government whose currency is an international reserve currency. The reduction in transaction costs of undertaking international trade when there is no hegemonic international reserve currency is in fact a corollary of the aforementioned process of restoration of policy sovereignty.
Triffin dilemma
Orthodox international macroeconomics holds that a reserve currency must be fully convertible, and that its issuing country must typically run a trade deficit rather than a surplus in order to supply that currency to the rest of the world, which is known as the Triffin dilemma. However, if a country whose currency is an international reserve currency has a current account surplus but is willing to lend or borrow in terms of the aforementioned currency to the extent that other countries that use this currency as an international currency need it, the Triffin dilemma may not operate.
Any currency can be an international reserve currency only if international economic actors believe that prices of commodities in terms of this currency can be relatively stable because of actions of the government that administers this currency. Both the Bretton Woods system and its successor, namely the petro-Dollar system, were based on this exercise of power by the US government.
US borrowings
The US Dollar gold standard was undermined by two factors: first, excessive borrowing by the US government to fund its military activities, especially the war against Vietnam; second, the rebuilding of West Germany and Japan after their destruction in the Second World War, under the aegis of the US-centred order, resulted in the average age of the capital stock in these two countries being less than in the US, where economic damage from the Second World War was negligible. This allowed Germany and Japan to out-compete the US for a range of commodities, which resulted in the US economy becoming an international borrower with a current account deficit.
The outcomes of recent exercises of unilateral power by the US government, most notably the trade and technology war against China, the economic war against Russia as well as the ongoing military-cum-economic war against Iran, have undercut the US. International economic actors have in fact broadly understood this ongoing attenuation of US power. This is why interest rates on US government securities are tending to rise.
Under these circumstances, the ability of the US government to exercise leverage over India in terms of international finance would reduce. India’s policy resilience would be enhanced if Indian trade, foreign investment, etc., are also sufficiently diversified so that no foreign government can exercise undue leverage on both Indian policy-making and Indian employment.
Past efforts to diversify international reserve currency use were often undertaken by individual countries such as Libya or Iraq, with limited or no broader coordination among other countries at the time. Therefore, it was not surprising that these efforts were unsuccessful and had large-scale adverse consequences for these countries, involving externally driven regime change.
Efforts towards diversification of international reserve currencies are best undertaken collectively by organisations such as BRICS.
Coming back to the present, restoration of currency sovereignty will remain incomplete as long as there are no capital controls on foreign portfolio investment. Capital controls will not undermine the ability of a currency to act as an international reserve currency, as long as all countries using the alternative international reserve currency have capital controls with respect to countries outside this alternative arrangement.
Sarkar is Assistant Professor in the Department of Economics, Dr Bhim Rao Ambedkar College, University of Delhi; Saratchand is Professor in the Dept of Economics, Satyawati College, University of Delhi
Published on September 15, 2026
