Special Drawing Right (SDR)

ROHAN MANGALURE ABHISHEK SHIRADKAR

What is SDR ?
The

SDR is an international reserve asset, created by the IMF in 1969.

SDRs

are allocated to member countries in proportion to their IMF quotas.

What is SDR? cont.

SDRs is an artificial currency used by the IMF and defined as a basket of national currencies.
SDRs instead represent a claim to currency held by IMF member countries for which they may be exchanged.

Definition

SDR is an international type of monetary reserve currency, created by the International Monetary Fund (IMF) in 1969, which operates as a supplement to the existing reserves of member countries. It is created in response to concerns about the limitations of gold and dollars as the sole means of settling international accounts.

Why was SDR created?

To support the Bretton Woods fixed exchange rate system. The dominant constituents of international reserves are:

Government or central bank holdings of gold. Widely accepted foreign currencies (USD).

Inadequacy of these two key reserve assets, led to creation of a new international reserve asset.

Why was SDR created?

US Dollar was the world's principal foreign exchange reserve asset. A deficit is necessary for the United States to supply world demand for its Dollars. A deficit will, in time, lessen the value of the Dollar and endanger the entire system.

Uses of SDR

For balance of payments settlements among the members. Used for transactions with fund for eg. By paying the reserve tranche.

SDR denominated bank deposits and loans have been offered in private financial markets.

SDR Valuation:

The value of the SDR initially defined as

0.888671 grams of fine gold = one U.S. dollar.

After the collapse of the Bretton Woods system in 1973, SDR was redefined as a basket of currencies. Basket consists of:

Euro Japanese yen Pound sterling U.S. dollar

The U.S. dollar-value of the SDR is posted

SDR Valuation:(contd. .)

Value of the SDR in national currency (say, ABC), multiply the four exchange rates of the home country vis--vis the basket-currency countries (i.e., ABC/USD, ABC/EUR, ABC/JPY, and ABC/GBP) with the basket values. Add these four numbers together to obtain the ABC/SDR exchange rate. Exchange rates quoted at noon each day in the London market. The basket composition is reviewed every five years by the Executive Board.

SDR Interest Rate

The SDR interest rate provides the basis for calculating:

Interest charged to members on regular (nonconcessional) IMF loans. Interest paid and charged to members on their SDR holdings and charged on their SDR allocations. Interest paid to members on a portion of their quota subscriptions.

The SDR interest rate is determined weekly. Is based on a weighted average of representative interest rates on short-term debt in the money markets of the SDR basket currencies.

SDR allocations to IMF members

Allocation of SDR is based on the proportion of IMF quotas of the members. If a member's SDR holdings rise above its allocation, it earns interest on the excess.

If it holds fewer SDRs than allocated, it pays interest on the shortfall.

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