How do SDRs help maintain balance of payments

Contact Counsellor

How do SDRs help maintain balance of payments

  • There was accretion of $31.2 billion in July-September 2021 in foreign exchange reserves of India
  • $17.86 billion of it was by way of Special Drawing Rights (SDR) support received from the International Monetary Fund (IMF) on 23 August 2021.

About SDR:

  • These were created by the IMF in 1969
  • These are international reserve assets and are meant to supplement countries’ reserves.
  • Adding SDRs to the country’s international reserves makes it more financially resilient.
  • It provides liquidity support to developing and low-income countries and allows them to tide over the balance of payments (BOP) situations
  • India has been experiencing such a situation due to the pandemic and also faced earlier in 1991.
  • An increase in holdings of SDR is reflected in the BOP as it is one of the components of foreign exchange reserves (FER) of a country

Key components of BOP:

  • The BOP divides transactions of a country with the rest of the world into two accounts: the current account and the capital account.
  • The current account consists of net trade of exports and imports of products and services, net earnings on cross-border investments and net transfer payments.
  • The capital account constitutes a country’s transactions in financial instruments i.e. assets and liabilities constituting direct investment, portfolio investment, loans, banking capital, and other capital.
  • International reserves and IMF transactions are also a key component of the BOP.

Significance of SDR support:

  • Countries worldwide are going through one of the worst health and economic crises, and India has been no exception.
  • The present support of $17.86 billion in August 2021 by way of SDR has helped cushion the worsening current account deficit.
  • It is also indicative of the fact that the domestic business environment is failing to attract foreign direct investment.
  • This might also point to external factors such as the US Federal Reserve’s plans to increase interest rates, which make FPIs move away from host countries such as India.

India’s BOP position:

  • In the July-September 2021 quarter, India’s current account slipped into a deficit of $9.58 billion as against a surplus of $6.57 billion in the April-June 2021 quarter.
  • In the January-March quarter of FY20, the country’s current account had recorded a surplus on the back of a higher decline in imports.