De-dollarisation will be a slow grind, says DBS chief economist ahead of Brics

As the global economy enters a more volatile phase, India’s growth resilience is facing fresh tests—from higher-for-longer US rates and geopolitical shocks to elevated oil prices and the push toward de-dollarisation. Radhika Rao, Executive Director and Chief Economist at DBS Bank, Singapore’s largest bank, says India remains resilient but is far from immune to external shocks.

In this wide-ranging conversation, Rao decodes India’s growth outlook, the rupee’s internationalisation, the future of the dollar, BRICS de-dollarisation and the risks confronting Asia, while explaining why private investment and global demand will become increasingly important to India’s next phase of growth.

Edited Excerpts:

The Jackson Hole Symposium has just concluded, and Kevin Warsh was much more hawkish in his statements. The narrative seems to have shifted from when the Fed will cut rates to when the Fed will hike rates. The probability of a September hike has increased. How do you see this from an Indian and global economy perspective?

Certainly, markets were seeking a bit more guidance from Mr Warsh, and to some extent this was addressed at Jackson Hole. In so far as the next move is concerned, he has kept it open-ended. He hasn’t committed but reinforced the fact that inflation and inflation management are very important for the central bank.

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So, between now and September, markets have priced in ~60 per cent probability of a Fed funds rate hike. I think between now and their next meeting, two big data points are important: NFP and inflation. In our own baseline view, we don’t have any rate hikes pencilled in for this year.

But just the tone might turn a lot more hawkish and cautious if the US-Iran conflict continues. Probability has gone up, but I don’t think it’s still a surety.

There are many other pieces that need to really fall into place ahead of the approaching mid-term elections. In the last four midterm elections and the US Fed fund rate movements around them, rate changes have exhibited independence – that is, years when labour markets were very tight and inflation was high, the Fed has hiked through the cycle. In essence, incoming data has been prioritised, rather than just being influenced by the political calendar.

Would you say markets have overreacted to what Warsh said at Jackson Hole and are interpreting more than required?

I would say the markets were waiting to see if there were any fresh inputs in the policy guidance. Yields have been swinging quite sharply from one meeting to the next, and over the past couple of months even official speeches have had an outsized impact on bond markets and rate expectations. Another key issue is the relationship between the Fed and the US Treasury.

This is not unique to the US; we are seeing similar dynamics across the region, where central bank and government priorities can diverge in a world of elevated interest rates. Warsh has suggested that higher long-term yields are already doing some of the Fed’s tightening work, while the Treasury’s priority is to keep borrowing costs contained, especially at the long end of the curve. Investors are watching closely to see how that balance ultimately plays out.

If the Fed hikes rates in September, where do you see the shock appearing first—in Asian currencies, bonds or equities?

A bit of a flattening bias in the yields is likely because the move might anchor long-end rates, whilst the short end adjusts up because of the rate hike. And guidance for moves thereafter will be important, which will dictate how much the markets associate moves thereafter. The move would be positive for the dollar and, by extension, lift USD/pairs and result in a negative impulse for EM FX negative space.

With the BRICS summit around the corner and so much discussion around de-dollarisation, what is your assessment? Is it simply countries expanding trade using different currencies, or is de-dollarisation really happening at a rapid pace? How do you see its future?

The de-dollarisation agenda has surfaced in earlier meetings as well, though the pace of developments differs across the countries. For instance, among the BRICS, the usage of yuan for bilateral trade is much higher than that of the other counterparts. India’s authorities have encouraged use of the rupee as well, strengthening the architecture and plumbing to conduct these transactions. Focus has also been on the end-use of the rupee funds that are with the trade partner.

Heightened discussions around de-dollarisation might see the US administration assume a defensive posture, returning with a threat of counter tariffs if any of these plans come to fruition.

When you look at the Indian economy at large, there have been several shocks since the year started, in terms of oil spiking, the Iran war and all these things. What is your assessment of the Indian economy right now, and what is the biggest test? You mentioned there have been multiple shocks. What is the biggest challenge you feel the Indian economy has to grapple with right now?

India has exhibited a good amount of resilience through the energy shock, although the exogenous problems have not completely gone away. Nonetheless, economic data, especially growth, shows that the inventory backup helped manufacturing activity, and consumption held up well in the June quarter, even though the financial markets and sentiments faced weakness.

If the oil crisis persists, some extent of impact is likely to be visible as higher input costs come down the supply chain to the end-consumer. Other important developments that warrant attention are geopolitical developments, protectionist trade policies and US rate movements. Higher USD and USD rates are a risk for the domestic asset classes.

What is your assessment of gold? In which direction do you see gold heading? 

Gold prices have endured a volatile year, soaring to a record high, only to correct by more than a third. More recently, there was a breakout on the upside, lifted by steady ETF inflows which provided an important underpinning to the rally and helped the market absorb periods of macro-driven weakness.

That said, speculative positioning warrants monitoring. CFTC data show that speculative net long positions have continued to build and are now approaching slightly elevated levels. While this reflects improving investor conviction, it also leaves the market somewhat vulnerable should the macro backdrop turn less supportive.

On a general note, one can be positive on gold, as and when the dollar debasement narrative returns. Developments on inflation, real demand for the yellow metal and USD rates are important determinants for the outlook.

What are your growth assumptions? Finance Minister Nirmala Sitharaman said yesterday, while addressing the diaspora in the United States, that 7 per cent growth is very much achievable. What is your assessment for FY27 and the next financial year?

The strong Q1 FY27 growth print reinforced the view that India’s domestic demand cycle was more resilient than initially feared, with consumption, public capex and manufacturing providing a solid base despite external shocks. Other tailwinds from indirect tax relief, real rate buffer, modest pump price increases, and easier monetary conditions were also supportive of the uptrend.

Investors will look for indications of broadening out in momentum for private capex and investment in the second half of the year. The goods trade outlook will be clouded by still high energy prices, though a concerted effort to diversify sources has proved to be a timely response to maintain supplies. The key risks are now less about a softer domestic story and more about the persistence of high oil prices, rupee weakness and tighter global financial conditions. We expect full-year growth to average 7.3 per cent yoy in FY27 from 7.8 per cent last year.

Can the rupee become a meaningful regional trade currency without fully having capital-account convertibility?

The rupee can become a more meaningful regional trade currency without full capital-account convertibility if India continues to expand local-currency trade arrangements, develops deeper financial markets, and maintains macroeconomic stability. However, the absence of full convertibility limits the currency’s appeal as a reserve and investment alternative. For a larger regional role, the broader move towards building confidence that rupee balances can be deployed, invested, and repatriated with ease is necessary.

Ten years from now, do you see a multipolar monetary system, or do you still feel that despite the push for de-dollarisation and voices coming from different parts of the world, the dollar will remain the dominant force?

Over the past decade, there has been a gradual reduction in the share of the dollar in the global reserve stock. The most likely outcome is not de-dollarisation, but less exclusive dollarisation. A growing share of trade and regional financial flows is being settled in alternative currencies, especially yuan. So in a decade ahead, it might not be wrong to assume that the share of the dollar might moderate further. At the same time, the ECB seems to have warmed up to the idea that the euro can be a potential alternative.

From your point of view, what is the biggest macro risk that Asia is witnessing or going to witness? Is it the stronger dollar, higher oil prices or a slowdown in China? What are the top macro risks for Asian countries?

For the Asian countries, the top three risks are the first one, of course, geopolitics; We are entering the seventh month now of the US-Iran conflict. But geopolitics tends to be episodic, so it could get cleared, easing macroeconomic stress. Energy security has become a very important mandate for many of these countries. Second would be the direction of the US and US rates. The third would be an AI-related bust, which could ripple through not only the equity markets but also have real economic implications via the export channels. Countries have built a lot of capacity in electronics and semiconductor supply chains, so a strong slowdown in that cycle would certainly be a big negative for this region.

What are the strongest points of the Indian economy? We always talk about our consumption story insulating us from outside-world shocks. Do you believe consumption or domestic demand is enough to insulate India from all the shocks being thrown at us?

India has become a lot more intertwined with global developments over time, with the passthrough channels including private sector investments and trade performance. Consumption to some extent is insulated, while we already notice private sector investments occurring in selected sectors, especially the new age ones, steel, cement, etc. Nonetheless, it is important that the investment cycle broadens over to include more sectors, including labour-intensive and traditional ones. Hence, to a great extent, India’s organic drivers, including services, add resilience to the growth story, albeit the economy would not be completely immune to a global downcycle.

What are the top three strengths of the Indian economy compared with its Asian peers?

Macro stability is one; buffers have improved, and external balances have narrowed, especially current account and fiscal balances. Foreign reserves more recently are at record levels, in a much stronger position than back during the taper tantrum. Inflation has also come down to much more manageable levels despite the energy shock, with food also largely stable other than during weather- and supply-related disruptions.

Second are strong strides that India has made from being a non-player in the global supply chain to becoming quite intrinsic, especially in certain sectors, including electronics, and seeking to expand that to semiconductors and green industries, which provides an opportunity for domestic companies to take a bigger bite of that share. Conducive incentives have been announced in the face of heightened regional competition.

Third is the maturity of institutions and institutional independence. India ranks high on this count, in so far as strong credibility and independence of institutions are concerned, at a time when related fissures have surfaced amongst peer countries.

At the upcoming BRICS summit, what are your big economic and trade-related expectations if you’re closely tracking BRICS?

As discussed earlier, economies are moving from a unipolar world to a multipolar world, so the group could consider the possibility of smoothing trade relations. Diplomacy, security, green transition and building defence capabilities are important. The BRICS group has also widened in the past two years, increasingly representative of the Global South.