Uday Kotak, the CEO of Kotak Mahindra Bank, one of the largest financial institutions in India, recently shared his perspective on the dominance of the U.S. dollar in global financial markets. Despite previously referring to the currency as the “biggest financial terrorist in the world,” he now stated that the U.S. dollar has “disproportionate power” as a reserve currency. Kotak’s remarks have sparked a debate on the role and influence of the U.S. dollar in the global economy and whether countries should explore alternative reserve currencies.
Kotak’s Criticism of the U.S. Dollar
During the ET Corporate Excellence Awards event, Kotak spoke about the subordination that world markets have to the U.S. dollar hegemony. He referred to the American currency as the “biggest financial terrorist in the world” and criticized the power it has as a reserve currency. This dependence on the U.S. dollar is what is driving several nations to explore alternative reserve currencies to reduce their dependence on it, Kotak remarked. He stated that this is a “crucial time in world history” as countries are searching for alternatives that can better serve their interests.
Kotak clarified his statements later on social media, explaining that he wanted to refer to the “disproportionate power” the currency has in world markets. Kotak emphasized the power of the U.S. dollar, stating: “All our money is in nostro accounts, and somebody in the U.S. can say— you cannot withdraw it from tomorrow morning— and you are stuck. That is the power of the reserve currency.”
The Run to Have the Next Reserve Currency
Kotak observed that global geopolitics and the rise of sanctions against Russia have changed the landscape of how payments are being settled and which currencies are being used. China has made advancements in profiling the Chinese yuan as a friendly token for international markets with Russia also promoting it. On the different countries that might become holders of the next reserve currency, Kotak stated: “I don’t think Europe can because it is the disunited states of Europe. I don’t think UK or Japan have the heft to be taking that position, though both the British pound and the yen are free currencies. China, I think, has a major issue of trust with many many countries around the world.”
Kotak believes that India can have a shot at making the Indian rupee the next U.S. currency, but it will take ten years, during which the country will have to build strong institutions and a framework behind it. India has already opened its doors to other countries to settle cross-border payments with the Indian rupee, as part of its most recent foreign trade policy guidance, with the objective of allowing countries facing a dollar crunch to keep trading goods.
The Role of the U.S. Dollar in the Global Economy
The U.S. dollar has long been the dominant reserve currency in the global economy, with many countries keeping their foreign exchange reserves in U.S. dollars for stability and security. This has given the U.S. dollar disproportionate power in the global economy. Many experts argue that this reliance on the U.S. dollar puts countries vulnerable to the U.S. government’s foreign policies and unilateral decisions that can have tremendous economic consequences.
Furthermore, the dominance of the U.S. dollar has allowed the United States to run persistent trade deficits and finance its debt through the sale of U.S. Treasury bonds to the rest of the world. This dynamic has helped fund the U.S. government’s spending and allowed Americans to enjoy a high standard of living. However, it has also contributed to the accumulation of U.S. debt, which has surpassed $28 trillion, and raised concerns about the sustainability of the U.S. fiscal and monetary policy.
Conclusion
Kotak’s comments have reignited the debate on the role and influence of the U.S. dollar in the global economy. While countries are exploring alternative reserve currencies, any shift away from the U.S. dollar as the dominant reserve currency is likely to have significant impacts on the global economic and geopolitical landscape. Whether India can establish the Indian rupee as an alternative reserve currency remains to be seen, but it is clear that the global financial system is undergoing a significant transformation as countries seek to reduce their dependence on the U.S. dollar.
