Dollar vs Digital Yuan: Can India Stay Neutral in the Currency Cold War?
Khushi V Rangdhol Sep 12, 2025 22:31
In 2025, India aims for neutrality in the currency landscape, enhancing rupee stability and expanding non-USD payment options while avoiding reliance on the digital yuan or the dollar.
India has no desire to pick a side between Washington’s greenback and Beijing’s e-CNY. Its playbook in 2025 is simpler—and harder: keep the rupee stable, widen non-USD payment pipes, and say yes to efficiency without surrendering policy autonomy.
The battlefield, in brief
The U.S. dollar still anchors the system. The IMF’s COFER database continues to show the dollar as the dominant reserve currency—well ahead of the euro and other majors. India’s own cushion recently topped $700 billion in FX reserves, a reminder that New Delhi prizes insulation from shocks more than symbolism.
China’s counter-narrative is twofold: expand yuan settlement via CIPS and showcase the digital yuan (e-CNY) as a faster, sanction-resilient rail. In June 2025, the PBOC touted foreign banks joining CIPS and framed digitalization as a way around geopolitical choke points. Hong Kong has already allowed retail e-CNY wallets for local spending under caps—small in scale but symbolically cross-border.
On the CBDC front, the BIS-coordinated Project mBridge—which includes China, Hong Kong, Thailand, the UAE and others—reached a minimum viable product in 2024. It’s a proof that multi-CBDC settlement is technically viable, even as governance questions remain.
India’s strategy: build more pipes, keep the tap in rupees
New Delhi is not trying to dethrone the dollar; it’s trying to add options.
- Local-currency settlement with the UAE. Since July 2023, the RBI and the UAE have MoUs to promote rupee–dirham settlement and to link fast-payment systems. In August 2024, Reuters reported that the RBI asked banks dealing with the UAE to actually route a share of trade via direct INR–AED settlement. In August 2025, the RBI eased SRVA rules, removing prior approvals to speed up rupee trade accounts.
- Real-time retail corridors. India and Singapore launched UPI–PayNow in 2023. The bank list expanded in July 2025, widening access for migrants and SMEs, and India joined a BIS-backed plan (Project Nexus) to connect instant payment systems across five Southeast Asian economies by 2026. These are dollar-light channels for small payments that add up.
- Codifying rupee internationalisation. The RBI keeps updating FAQs and rules for INR trade settlement (SRVAs, invoicing norms), a slow but deliberate way to make rupee use administratively easy.
This is not de-dollarisation. It is de-risking: more plugs in the wall so a short circuit in one currency system doesn’t shut the lights.
The neutrality tightrope
Neutrality isn’t a slogan; it’s a set of trade-offs India manages daily.
Market stability first. When the rupee wobbles, the RBI steps in—onshore and via the offshore NDF market—to keep moves “orderly.” That posture was visible again in September 2025 amid tariff headlines. It signals that FX stability trumps experiments.
Open to tech, wary of dependence. India is running its own retail CBDC pilot and supports fast-payment interlinks, but it has not signed up to use the e-CNY for Indian retail or trade. The calculus is clear: embrace interoperable rails, avoid a single issuer’s leverage.
BRICS without a bloc currency. The 2025 BRICS leaders’ declaration talks up interoperable payments and local currencies, not a shared coin. That aligns with India’s long-stated view that multiple national currencies—including the rupee—should see more use in trade, rather than swapping one hegemon for another.
What the digital yuan actually changes—and what it doesn’t
The e-CNY is the world’s largest CBDC pilot by scale, with transaction totals climbing through 2024; Hong Kong’s retail link shows limited cross-border use under caps. But global reach requires more than wallets: convertibility, deep hedging markets, legal certainty, and political reassurance for counterparties. On those fronts, the dollar still has an order-of-magnitude lead.
Projects like mBridge matter because they could lower friction for trade partners that already bill in CNY, AED, or INR. Yet governance remains the hinge: who sets rules, who can see flows, and how sanctions or AML standards apply across jurisdictions. Until those are settled, most institutions will treat multi-CBDC rails as adjacent, not foundational.
The likely 2025–26 path
Expect India to thicken rupee routes where trade volumes justify it (UAE first, Southeast Asia next), expand instant-payment links, and keep large FX buffers while calibrating capital-flow rules. Don’t expect a pivot to e-CNY settlement for Indian retail or a dramatic reserve reallocation away from the dollar absent a major geopolitical shock. The incentives still point to plurality, not replacement.
The bottom line
India’s best defense against a currency cold war is redundancy: multiple rails, more local-currency options, and resilience in the rupee’s own plumbing. In that world, the dollar remains the main highway, the digital yuan becomes a growing arterial road for those who choose it, and India’s task is to build interchanges—without letting any one builder own the toll booth.
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