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.