In recent news, the International Monetary Fund (IMF) has allocated Special Drawing Rights (SDRs) amounting to 12.57 billion to India. With the current exchange rate taken into account, this allocation is approximately $17.86 billion. Following this addition, India’s total SDR holdings have risen and now stand at 13.66 billion.
Understanding Special Drawing Rights (SDR)
SDR is an international financial asset which is neither considered a currency nor a claim on the IMF. Instead, it serves as a potential claim on the freely usable currencies of IMF members. The purpose of SDRs is to supplement the member countries’ official reserves. The value of the SDR is derived from a basket of five major currencies – the US dollar, Euro, Japanese yen, pound sterling and the Chinese renminbi. This valuation is calculated daily, barring IMF holidays or days when IMD is closed for business, and the valuation basket is reviewed and revised every five years.
The Significance of Quotas
The quota, which is the contribution made to the IMF by a member country, is denominated in SDRs. The voting power of member countries is directly related to their quotas. When the IMF allocates SDRs, it is done so proportionally to the existing quotas of its members. Elements of India’s foreign exchange reserves include SDRs, along with gold reserves, foreign currency assets, and reserve tranche in the IMF.
The Role of the International Monetary Fund (IMF)
The IMF, established alongside the World Bank following World War II, was initially set up to aid the rebuilding of countries devastated by the war. This arrangement was made at a conference held in Bretton Woods, USA, leading to both institutions being referred to as the Bretton Woods twins. Formed officially in 1945, the IMF is governed by its member countries, which total 190. India became a member in December 1945.
The fundamental role of the IMF is to maintain the stability of the international monetary system. This mechanism of exchange rates and global payments allows countries and their citizens to conduct transactions with each other effectively. In 2012, the IMF broadened its mandate to include issues related to macroeconomics and the financial sector that could potentially affect global stability.
Reports Delivered by the IMF
As part of its activities, the IMF regularly publishes two reports: the Global Financial Stability Report and the World Economic Outlook, both deemed crucial for understanding the international economic climate.
