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IMF raises India’s special drawing rights allocation

Context:

The International Monetary Fund (IMF) has sharply increased its allocation of Special Drawing Rights (SDR) to India, in line with the country’s existing quota in the fund.

The IMF has made an allocation of Special Drawing Rights (SDR) 12.57 billion (equivalent to around $17.86 billion at the latest exchange rate) to India. Now, the total SDR holdings of India stand at SDR 13.66 billion.

Relevance:

Prelims, GS-III: Indian Economy (External Sector, Important International Institutions)

Dimensions of the Article:

  1. International Monetary Fund (IMF)
  2. About Special Drawing Rights (SDR)

International Monetary Fund (IMF)

  • The International Monetary Fund (IMF) is an international organization headquartered in Washington, D.C.
  • It consists of 189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
  • It periodically depends on the World Bank for its resources.
  • Through the fund and other activities such as the gathering of statistics and analysis, surveillance of its members’ economies, and the demand for particular policies, the IMF works to improve the economies of its member countries.

Functions of the IMF

  • To provide financial assistance to member countries with balance of payments problems, the IMF lends money to replenish international reserves, stabilize currencies and strengthen conditions for economic growth. Countries must embark on structural adjustment policies monitored by the IMF.
  • It oversees the international monetary system and monitors the economic and financial policies of its 189 member countries. As part of this process, which takes place both at the global level and in individual countries, the IMF highlights possible risks to stability and advises on needed policy adjustments.
  • It provides technical assistance and training to central banks, finance ministries, tax authorities, and other economic institutions. This helps countries raise public revenues, modernize banking systems, develop strong legal frameworks, improve governance, and enhance the reporting of macroeconomic and financial data. It also helps countries to make progress towards the Sustainable Development Goals (SDGs).

About Special Drawing Rights (SDR)

  • Special Drawing Rights (SDR) serves as the unit of account of the IMF and some other international organizations and it I s a a potential claim on the freely usable currencies of IMF members 
  • The currency value of the SDR is determined by summing the values of a SDR basket of currencies in US dollars, based on market exchange rates.
  • 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 and Members’ voting power is related directly to their quotas. IMF makes the general SDR allocation to its members in proportion to their existing quotas in the IMF.
  • India’s foreign exchange reserves also incorporate SDR other than gold reserves, foreign currency assets and Reserve Tranche in the IMF.                       

How is SDR used?

  • 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 of the SDR basket

  • 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.

-Source: Business Standard

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October 2022
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