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SPECIAL DRAWING RIGHTS

May 17, 2022

SPECIAL DRAWING RIGHTS

Why in News?

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.

About

  • The IMF raised the yuan’s weighting to 12.28% from 10.92 % in its first regular review of the SDR evaluation since the Chinese currency was included in the basket in 2016.
  • The weighting of the US dollar rose to 43.38 % from 41.73 %, while those of euro, Japanese yen and British pound declined.
  • The ranking of the currencies’ weighting remains the same after the review, with the yuan continuing to be in third place.
  • The change came amid a sharp depreciation of the yuan since late April, as it faces a double whammy of slowing domestic growth because of Covid-induced lockdowns and capital outflows due to its widening monetary policy divergence with the US.

Special Drawing Right

  • 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.
  • The SDR serves as the unit of account of the IMF and some other international organizations.
  • The currency value of the SDR is determined by summing the values in US dollars, based on market exchange rates, of a SDR basket of currencies.
  • The SDR basket of currencies includes the US dollar, Euro, Japanese yen, pound sterling and the Chinese renminbi (included in 2016).
  • The SDR currency value is calculated daily (except on IMF holidays or whenever the IMF is closed for business) and the valuation basket is reviewed and adjusted every five years.
  • Quota (the amount contributed to the IMF) of a country is denominated in SDRs.

India’s quota in IMF

  • In 2016, IMF’s quota and governance reforms took place.
  • According to which, India’s voting rights increased by 0.3% from then 2.3% to 2.6% and China’s voting rights increased by 2.2% from then 3.8% to 6%.
  • Presently, India holds 2.75% of SDR quota, and 2.63% of votes in the IMF.
  • India's foreign exchange reserves also incorporate SDR other than gold reserves, foreign currency assets and Reserve Tranche in the IMF.