IMF and the SDR(Special Drawing Rights) basket
- The IMF has increased the weightage of Chinese Yuan and US Dollar in the first review of SDR basket since the IMF added Yuan in the basket of currency in 2016.
Major changes and Why in the news?
- The IMF has raised the weightage of the US dollar from 41.73% to 43.38%.
- The weightage of the Chinese yuan has been raised from 10.92% to 12.28%.
- While the weightage of Euro, British pound and Japanese Yen has gone down from 30.93% to 29.31, 8.09% to 7.44% and 8.33% to 7.59% respectively.
About IMF and SDR(Special Drawing Rights) basket
- The IMF was established in 1944 in the aftermath of the Great Depression of the 1930s.
- 44 founding member countries sought to build a framework for international economic cooperation.
- Today, its membership embraces 190 countries, to whom it is accountable.
- At the top of its organizational structure is the Board of Governors. The day-to-day work of the IMF is overseen by its 24-member Executive Board, which represents the entire membership.
- The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.
- To date, a total of SDR 660.7 billion (equivalent to about US$943 billion) have been allocated. This includes the largest-ever allocation of about SDR 456 billion approved on August 2, 2021 to address the long-term global need for reserves, and help countries cope with the impact of the COVID-19 pandemic.
- The value of the SDR is based on a basket of five currencies — the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
Significance of the move
- The rise in share of Chinese yuan and the US dollar signifies their rising use and stature in global trade despite Covid 19 pandemic and advances in fintech technology.
- This further supplements the goal of China to internationalize its currency.
- SDR is part of the forex reserve of each country. The rise in share of Chinese yuan indirectly raises the role of the Chinese yuan in their forex reserves management.
- India received a major chunk of SDR General allocation in 2021. The move will marginally increase Chinese currency in Indian forex reserves.
- India too should try to Internationalize its currency through adoption in global trade and SDR basket.
- SDR basket
- Forex reserve
Que - Suggest ways to Internationalize the Indian currency. What benefits would it bring for Indian trade and financial systems?