Dollar Dominance and Policy Autonomy of Emerging Economies, Special Emphasis on India: An Analytical Assessment

Abstract: This research paper analyzes how dollar dominance shapes growth and macroeconomic outcomes through pricing, invoicing, funding, and balance-sheet channels, with a special focus on India. It argues that the dollar’s convenience yield, trade invoicing network effects, and the global financial cycle jointly amplify exchange-rate pass-through and tighten domestic financial conditions in response to US monetary shocks. Using India as a case study, it maps mechanisms to policy: exchange-rate management and transparent FX intervention frameworks; reserve adequacy calibrated to tail risks; deep, onshore INR hedging markets; prudential rules to limit unhedged FX exposures; and targeted rupee internationalization. The chapter highlights trade-offs—FX flexibility vs imported inflation, reserve costs vs insurance, and market deepening vs stability risks—and proposes a pragmatic mix: clear FXI glidepaths, deeper forward/swap liquidity, diversified invoicing in commodities/intermediates, and credible backstops (swap lines, market-maker-of-last-resort protocols, and liquidity coverage in FX). It concludes with testable indicators for progress and welfare gains. Dollar dominance transmits US monetary shocks to India via pricing and invoicing, funding constraints, and FX-mismatch balance sheets, raising pass-through and tightening financial conditions. Network effects and convenience yield entrench USD use; reducing exposure requires credible alternatives with liquidity and policy backstops. Calibrate exchange-rate policy with transparent FX intervention rules: allow two-way flexibility while containing disorderly moves that elevate pass-through. Anchor reserves to tail risks (import cover, short-term external debt, and stress scenarios) and clarify deployment strategy. Deepen INR hedging markets: improve onshore forward and swap depth, market-making capacity, and reduce frictional costs to lift hedge ratios. Targeted INR internationalization: expand INR invoicing in commodity and intermediate imports with reliable settlement rails; support with standing swap lines and LCR in FX. Track progress with falsifiable metrics: lower CPI pass-through to USD shocks, reduced portfolio beta to US rates, higher INR share in settlement, and stable term premia. Introduction: The Architecture of Dollar Power In the contemporary international order, the United States dollar functions as more than a currency—it is the fulcrum around which the global economic system revolves.