Q. Recently, which one of the following currencies has been proposed to be added to the basket of IMF’s SDR?

  • Rouble
  • Rand
  • Indian Rupee
  • Renminbi

Answer: (d) Renminbi

Special Drawing Right (SDR):
  • The SDR is an international reserve asset. The SDR is not a currency, but its value is based on a basket of five currencies—the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
  • The SDR serves as the unit of account of the IMF and some other international organizations.
  • The currency value of the SDR is determined by summing the values in US dollars, based on market exchange rates, of a SDR basket of currencies.
  • 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.
    • 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 quota in IMF:
    • In 2016, IMF’s quota and governance reforms took place.
    • According to which, India’s voting rights increased by 0.3% from then 2.3% to 2.6% and China’s voting rights increased by 2.2% from then 3.8% to 6%.
    • Presently, India holds 2.75% of SDR quota, and 2.63% of votes in the IMF.
    • India’s foreign exchange reserves also incorporate SDR other than gold reserves, foreign currency assets and Reserve Tranche in the IMF.
Quinquennial SDR valuation
What is the purpose of the SDR?
  • The IMF created the SDR as a supplementary international reserve asset in 1969, when currencies were tied to the price of gold and the US dollar was the leading international reserve asset. The IMF defined the SDR as equivalent to a fractional amount of gold that was equivalent to one US dollar.
  • When fixed exchange rates ended in 1973, the IMF redefined the SDR as equivalent to the value of a basket of world currencies.
  • The SDR itself is not a currency but an asset that holders can exchange for currency when needed. The SDR serves as the unit of account of the IMF and other international organizations.
Who can hold SDRs?
  • Individuals and private entities cannot hold SDRs. IMF members – and the IMF itself – hold SDRs and the IMF has the authority to approve other holders, such as central banks and multilateral development banks, while individuals and private entities cannot hold SDRs.
  • As of February 2023, there were 20 organizations approved as prescribed holders. Participating members and prescribed holders can buy and sell SDRs. However, prescribed holders do not receive allocations of SDRs, and they may not request an exchange of SDRs in transactions with designation as members do.
General allocations of SDRs
  • The Articles of Agreement allow the IMF to allocate SDRs to members – but not prescribed holders – under certain conditions.
  • There have been four general allocations, most recently in 2021, when the IMF’s Board of Governors approved a general allocation of about SDR 456 billion, equivalent to US$650 billion, to boost global liquidity.
    • The distribution – the largest SDR allocation in the history of the IMF – helped countries respond to the COVID-19 pandemic.
    • The general allocation of about SDR 161 billion in 2009, equivalent to US$250 billion, boosted liquidity amid a global financial crisis.
  • A general allocation of SDRs requires broad support from the IMF’s members. The IMF distributes a general allocation to member countries in proportion to their quota shares at the IMF.
  • Special SDR allocation:
    • The IMF made a special one-time allocation of SDR 21.5 billion (about US$33 billion) in 2009 to make the allocation of SDRs more equitable for countries that joined the IMF after 1981.
    • At the time, those countries – more than one-fifth of the IMF’s members – had never received an SDR allocation.
SDR allocation