Mumbai. Bank Indonesia (BI) continues to reduce its dependence on the US dollar (de-dollarization) by forging a partnership with the Reserve Bank of India (RBI). Both central banks have agreed to promote the use of local currencies in transactions.

The memorandum of understanding was signed on Thursday in Mumbai, marking a collaborative effort to establish a framework for encouraging the use of each country's local currency in bilateral transactions between the rupee and rupiah. The agreement was signed by RBI Governor Shaktikanta Das and BI Governor Perry Warjiyo.

The BI-RBI memorandum of understanding aims to boost the use of their respective local currencies (Rupee and Rupiah) in bilateral transactions, covering current account and permissible capital account transactions, along with other agreed-upon economic and financial transactions. This collaboration allows exporters and importers to conduct transactions in local currencies, fostering the development of foreign exchange markets in both nations.

"Furthermore, the use of local currencies will reduce transaction costs and enhance the efficiency of transaction settlements," stated Erwin Haryono, Head of BI's Communication Department, in an official statement on Thursday.

He emphasized that this collaboration signifies a significant achievement in strengthening bilateral financial cooperation between BI and RBI. The broader use of local currencies in bilateral transactions is expected to contribute to promoting trade between Indonesia and India, deepening financial integration, and strengthening the historical, cultural, and economic ties between the two countries.

This collaboration expands upon similar agreements that Bank Indonesia has with the authorities of Malaysia (Bank Negara Malaysia), Thailand (Bank of Thailand), Japan (Japan Ministry of Finance), China (People's Bank of China), Singapore (Monetary Authority of Singapore), and South Korea (Bank of Korea).

In their August 2023 research, J.P. Morgan that de-dollarization entails a significant reduction in the use of dollars in world trade and financial transactions, decreasing national, institutional, and corporate demand for the greenback. This would diminish the dominance of the dollar-denominated global capital market, in which borrowers and lenders around the world transact in dollars. 

Fundamentally, de-dollarization would shift the balance of power among countries, and this could in turn reshape the global economy and markets. 

“The dollar’s transactional dominance remains top-of-class despite secular declines in U.S. trade shares. On the other hand, de-dollarization is evident in FX reserves, where the dollar’s share has declined to a record low of 58 percent,” said Meera Chandan, Co-Head of the Global FX Strategy research team at J.P. Morgan.