By Ravi Pokharna & Kuntala Karkun
For decades, the US dollar has been the world’s financial operating system, anchoring commodity pricing, trade invoicing, and reserve accumulation. But every operating system has a vulnerability: those who rely on it are exposed to its owner’s commands. This has turned global finance into a textbook prisoner’s dilemma. Individually, countries benefit from remaining in the dollar system; it is liquid, trusted, and universally accepted. Collectively, however, overdependence leaves them exposed to sanctions risk, liquidity shocks, and policy spillovers beyond their control.
India is now driving a structural recalibration by fostering bilateral trade settlements in local currencies. This isn’t just political posturing; it’s a calculated move to enhance monetary sovereignty and reduce dollar dependency. Instead of challenging the USD head-on, India is altering the incentives by building alternative payment rails. By prioritising bilateral trade, India is quietly breaking the status quo and raising global economic resilience.
Reducing the marginal cost of cooperation
Rather than calling for de-dollarisation, India has focused on reducing the marginal cost of cooperation, one trade corridor at a time. The foundational tool is the RBI’s Rupee Trade Settlement framework. This mechanism allows trading partner countries to hold the INR in special rupee vostro accounts (SRVAs) in Indian banks, bypassing the need for dollars.
As of February, 123 correspondent banks from 30 countries have opened 156 SRVAs with Indian banks. In absolute terms, it represents a small share of India’s overall trade. But directionally, it marks a shift from experimentation to adoption across corridors. Some key relationships include:
Russia: A geopolitical necessity turned into a financial template. Following Western sanctions, India’s share of Russian crude rose from 2% in 2021 to 31% in April-December 2025. A substantial and growing portion of this is now settled in INR and roubles.
UAE: In July 2023, India and UAE signed an MoU for using the INR and dirham for cross-border transactions. This January, it was confirmed that the local currency settlement system is now fully operational for crude oil and gold.
Malaysia: In April 2023, UCO Bank announced the opening of a special rupee vostro account with Malaysia’s Maybank. During PM Modi’s visit to Malaysia last month, both countries officially agreed to expedite the use of a INR-ringgit mechanism for all bilateral trade.
This strategy is extending into the digital domain via the Digital BRICS Bridge. In January, the RBI proposed interlinking of central bank digital currencies (CBDCs) of BRICS nations to make cross-border transactions as seamless as domestic ones. The emphasis hasn’t been on creating one “BRICS currency”, but on linking national digital currency systems with partner frameworks to enable faster, cheaper, and more resilient settlement.
The distinction is crucial. India is not asking partners to abandon the dollar. It is offering a narrow, low-risk alternative for specific transactions. In prisoner’s dilemma terms, India is not forcing a one-shot decision between defecting from the dollar system or staying put. It is transforming the interaction into a repeated game; where cooperation can begin incrementally, be tested, and expanded over time.
Energy trade is the anchor of this shift. The oil import bill for FY25 is estimated at ~$104 billion. These are recurring, predictable dollar outflows that maintain dollar dominance. By moving even a fraction of these payments to a digital or local currency rail, India reduces pressure on its current account and insulates itself from liquidity shocks.
The digital strategy solves a critical problem: deployment. In a digital ledger system, rupees received via trade can be instantly reinvested into Indian government bonds, infrastructure projects, or supply chains, as these assets are increasingly included in global indices. This is what alters the payoff matrix. Accepting rupees stops being a political accommodation and becomes a viable commercial decision.
The most important shift is psychological as much as financial. In a classic prisoner’s dilemma, cooperation fails because defection dominates. In repeated interactions, behaviour changes—gradually lowering uncertainty, reducing perceived risk, and increasing credibility of cooperation.
Repetition based approach
India’s approach is explicitly built around repetition. Energy contracts renew annually. Defence deals span decades. Services trade is continuous. Digital settlement platforms operate transaction by transaction. Each successful non-dollar settlement reduces uncertainty for the next one. The cost of settling outside the dollar falls, and the benefit of exclusive dollar reliance shrinks.
Importantly, India’s strategy avoids the risks that have constrained other attempts at currency internationalisation. It is not positioning the rupee as a global reserve currency, nor is it forcing premature capital-account openness.
Instead, the rupee is being positioned as a trade and settlement currency in specific, high-volume corridors where repeated interaction is guaranteed. This aligns with India’s broader geopolitical posture: strategic autonomy without bloc politics, diversification without disruption.
Constraints remain. Capital controls, exchange-rate management, and relatively shallow derivatives markets limit the rupee’s appeal for large reserve holdings. Digital settlement experiments within BRICS are still evolving and require careful governance to manage cybersecurity, liquidity, and regulatory risk.
History suggests currency influence follows real economic weight. As India’s share of global GDP, trade, and energy demand rises, so too will the demand for rupee-based settlement. The dollar will remain central to global finance for the foreseeable future. Its depth and network effects are unmatched. But dominance does not require exclusivity. In global finance, as in game theory, equilibria rarely collapse overnight. India is not trying to escape the dollar’s prisoner’s dilemma in one move. It is redesigning the game.
Ravi Pokharna & Kuntala Karkun are respectively Executive Director and Senior Visiting Fellow at Pahle India Foundation.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.