The International Monetary Fund (IMF) recently increased the weighting of the yuan in its Special Drawing Rights (SDR) currency basket. The move, which bumped up yuan’s weighting to 12.28% from 10.92%, was met with a commitment from the Chinese central bank to further open its financial markets. Meanwhile, the US dollar’s weighting also rose to 43.38% from 41.73%. Despite shifts in individual currency weightings, the ranking remained the same after the review, with the yuan holding its third-place position.
Understanding Special Drawing Rights
The SDR is not a currency nor a claim on the IMF but represents a potential claim on the freely usable currencies of IMF members. As such, it can be exchanged for these currencies. It also acts as the unit of account for the IMF and other international organizations. The SDR’s value is derived from a basket of currencies, currently comprising the US dollar, Euro, Japanese yen, pound sterling, and the Chinese renminbi. This valuation is calculated daily and reviewed every five years.
A member country’s quota in the IMF, which reflects its financial commitment to the institution, is denominated in SDRs, and its voting power is directly tied to this quota. The IMF allocates SDR generally to members in proportion to their existing quotas.
India’s Contribution and Role in the IMF
In 2016, the IMF enacted quota and governance reforms, leading to an increase in India’s vote share from 2.3% to 2.6%. Presently, India holds 2.75% of SDR quota and 2.63% of votes in the IMF. Notably, India’s foreign exchange reserves include SDR, in addition to gold reserves, foreign currency assets, and its reserve tranche in the IMF.
About International Monetary Fund
The IMF, established post-World War II alongside the World Bank, was tasked with reconstructing war-torn nations. Collectively known as the Bretton Woods twins, both institutions were born from a conference held in Bretton Woods, US. As of now, the IMF, which India joined in December 1945, comprises 190 member countries. Its primary purpose is to ensure global financial stability, encompassing exchange rates and international payments systems. However, in 2012, its mandate was expanded to include all macroeconomic and financial sector issues impacting global stability.
Reports by IMF
The IMF regularly publishes the Global Financial Stability Report and the World Economic Outlook, providing analysis and projections of crucial economic health indicators.
Historical Examination Questions on The Topic
In 2016, one of the questions in the UPSC Civil Services Examination asked candidates to identify the currency that had been proposed for addition to the basket of IMF’s SDR – the answer was the Chinese renminbi. In the same vein, the 2013 examination included questions about what constitutes India’s foreign exchange reserves.