Topics Covered: Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.
Special Drawing Rights (SDR)
What to study?
For Prelims: SDR- meaning, objectives, composition and features.
For Mains: Significance of SDRs.
Context: India is not supporting a general allocation of new Special Drawing Rights (SDR) by the International Monetary Fund (IMF) because it feels it might not be effective in easing COVID-19-driven financial pressures.
The new SDR allocation was supposed to provide all 189 members with new foreign exchange reserves with no conditions.
What’s the reason?
Such a major liquidity injection could produce potentially costly side-effects if countries used the funds for “extraneous” purposes.
What is a Special Drawing Right (SDR)?
The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.
The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
So far SDR 204.2 billion (equivalent to about US$281 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis.
The role of the SDR:
- The SDR was created as a supplementary international reserve asset in the context of the Bretton Woods fixed exchange rate system.
- The SDR serves as the unit of account of the IMF and some other international organizations.
- 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.
- SDRs can be exchanged for these currencies.
Review:
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.
The reviews cover the key elements of the SDR method of valuation, including criteria and indicators used in selecting SDR basket currencies and the initial currency weights used in determining the amounts (number of units) of each currency in the SDR basket.
Insta Links:
Prelims Link:
- What is SDR?
- SDR basket includes?
- When is it reviewed?
- What are IMF quotas?
- Can SDR be exchanged for any currency?
Mains Link:
What do you understand by Special Drawing Rights (SDR)? Discuss their significance and key features.
Sources: the Hindu.
