What are Special Drawing Rights (SDRs) ?

Special Drawing Rights (SDRs) international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies,  U.S. dollars ($), euro (€), pounds sterling (£), and Japanese yen (¥).

A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in foreign exchange markets, as required to maintain its exchange rate.

Purpose :

The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways:

  • first, through the arrangement of voluntary exchanges between members; and
  • second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.
  • In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations.

Why Is it in the news ? 

The International Monetary Fund, which manages the SDRs, is conducting a five-yearly review of the basket of currencies that form its value. China wants it to bring the yuan into the basket.

IMF staff on Saturday recommended that the currency be included in the IMF’s benchmark foreign exchange basket, a move that will indirectly benefit India as well

This is a big decision, meaning that the IMF has in effect recognised the yuan as a reserve currency, despite China’s extensive capital controls. It would not suddenly turn the yuan into a rival to the dollar . But it would be a symbolic boost to its international standing, giving countries more confidence to add the yuan to their currency reserves.

Managing Director of the IMF Christine Lagarde also endorsed the yuan’s inclusion in the IMF’s Special Drawing Rights basket.

Almost there 

“The staff of the IMF has today issued a paper to the Executive Board on the quinquennial review of the SDR (Special Drawing Rights). A key focus of the Board review is whether the Chinese renminbi (RMB)… also meets the other existing criterion, that the currency be ‘freely usable’, which is defined as being ‘widely used’ for international transactions and ‘widely traded’ in the principal foreign exchange markets,” Ms. Lagarde said in a statement.

The inclusion of the yuan in this basket has been endorsed by almost all of the major economies of the world, including Germany, Britain, France and Italy. The U.S. was historically cautious about this, but recently softened its stance in September when President Obama said the U.S. would support China’s bid for inclusion in the SDR basket as long as it met the IMF’s technical specifications, which it now has.

The Indian Angle 

“The yuan’s inclusion in the SDR basket, when it happens, will be a great victory for China. It will mean a global economic coming of age for them, and will mean that the yuan is now a reserve currency for the world and all that entails,” Mr. Subramanian said.

However, to meet the various requirements to achieve this, China has had to open up its closed capital account, he added, saying that this is ‘unambiguously a good thing’ for India.

“The ability of China to manipulate its exchange rate has become more restricted. Not only did India have to deal with China’s over-capacity, but also its devalued currency,” he said, adding that the latter will be less of a problem once the yuan enters the SDR basket.

Article is modified version of Hindu Article. From various sources.

How does the Foreign Trade Policy 2015-2020 strategise to reduce our trade deficit with China?

Presently, India has a USD $48 billion trade deficit with China. Foreign Trade Policy 2015-2020 projects that if the current situation persists, then India will have an unsustainable trade deficit of US$ 60 billion with China by 2016-17.

The FTP has laid down an approach to bridge this deficit. This will require focus on increasing market access through removal of non-tariff barriers on particularly agro commodities including bovine meat , oil meals and cake, tobacco, rice fruits and vegetables etc. and seek tariff concessions in specific products of interest to India; seeking market access for Indian IT services and encourage other service sectors like tourism, films and entertainment; attracting Chinese investment to boost India’s manufacturing capacity and finally, operationalizing the five year development programme for economic and trade cooperation that lays down the roadmap for deepening and balancing bilateral economic engagement.

Of these, increased investment is likely to be a game changer in reducing India’s trade deficit with China. It is evident that Chinese companies are changing their roles from global manufacturers to global investors. For the first time in 2014, China became a net exporter of capital, with outward investment exceeding the inward investment. According to a 2015 report by Ernst and Young, outbound investment flows from China have exceeded US$ 100 billion in 2014, making China the world’s third largest overseas investor.

However, so far Chinese investments in India have been very low. Even though investment flows during 2000-01 and 2010-11 were almost negligible, for the first time, during 2011-12 and 2012-13, FDI inflows worth US$ 224 million from China were reported. Although this is way below the potential levels of investment flows from China, it is an indication of the synergies that can be realized between the two countries.

Perhaps the most effective way for China to participate in India’s infrastructure development would be through the development of industrial corridors. Since India has a large hinterland, it is important to develop industrial corridors which connect ports to manufacturing hubs. These corridors are envisaged as industrial townships with efficient road and rail connectiv­ity for freight movement to and from ports and logistics hubs, and reliable power which would provide an environment that is conducive for setting up globally competitive busi­nesses.

The government of India has conceptualized some of the industrial corridors which include the Delhi-Mumbai Industrial Corridor (DMIC), the Chennai- Bangalore Industrial Corridor (CBIC) and the Bangalore-Mumbai Economic Corridor (BMEC) among others. Japan has been the most active participant in this economic activity. For example, in DMIC, Japan is currently a main project stakeholder with a 26 percent share and has shown interest in collaborating for CBIC as well. The potential to develop these corridors remains largely untapped and China could be an active participant.