Context
Recently, the International Monetary Fund lifted the yuan’s weighting in the Special Drawing Rights currency basket, prompting the Chinese central bank to pledge to push for a further opening of its financial markets.
- This is the first such review in SDR since Yuan was added to the basket of currencies in 2016.
About SDR
- The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.
- The SDR was created as a supplementary international reserve asset in the context of the Bretton Woods fixed exchange rate system.
- The SDR is based on a basket of international currencies comprising the U.S. dollar, Japanese yen, euro, pound sterling and Chinese Renminbi.
- The SDR basket is reviewed every five years, or earlier if warranted, to ensure that the basket reflects the relative importance of currencies in the world’s trading and financial systems.
Impact on India
- Each country holds a quota of SDRs, which also determines its voting rights at the IMF board.
- An expansion of SDRs, therefore, means a larger resource base to draw on in times of crisis.
- India has long pushed for an expansion of the IMF’s resources and reform of the quota system to fairly represent emerging markets.
- An expansion in SDRs could have been combined with a reallocation of voting rights as in 2010.
- A quota review would certainly mean a large increase in voting rights for China, which is represented far below its economic weight, along with the US losing its veto power.
- The Reserve Bank of India has around 18% of GDP locked up in forex reserves, a fraction of this would make a huge difference to the economy without putting fiscal stability at risk.
