SDR - ECONOMY
News: RBI
panel suggests measures for internationalization of rupee; inclusion of INR in
IMF’s SDR
What's in the news?
● A
Reserve Bank of India-appointed working group recommended various measures,
including inclusion of the rupee in the Special Drawing Rights (SDR) basket and
recalibration of the foreign portfolio investor (FPI) regime to accelerate the
pace of internationalization of the rupee.
Key takeaways:
Internationalization of Rupees:
● Internationalization
is a process that involves increasing the use of the rupee in cross-border
transactions.
● It
involves promoting the rupee for import and export trade and then other current
account transactions, followed by its use in capital account transactions.
● These
are all transactions between residents in India and non-residents.
● The
internationalization of the currency, which is closely interlinked with the
nation’s economic progress, requires further opening up of the currency
settlement and a strong swap and forex market.
● It
will require full convertibility of the currency on the capital account and cross-border
transfer of funds without any restrictions. India has allowed only full
convertibility on the current account as of now.
● Currently,
the US dollar, the Euro, the Japanese yen and the pound sterling are the
leading reserve currencies in the world. China’s efforts to make its currency
renminbi has met with only limited success so far.
SDR:
● Special Drawing Rights
(SDRs) is the IMF’s unit of account and not a currency.
SDR Basket:
● SDR basket of currencies
includes the U.S. dollar, Euro, Japanese yen, pound sterling and the Chinese
renminbi (included in 2016).
● The
currency value of the SDR is determined by summing the values in U.S. dollars,
based on market exchange rates, of a SDR basket of currencies.
SDR Valuation:
● 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.
Importance of SDR:
● Quotas are denominated
(expressed) in SDRs.
● SDRs
represent a claim to currency held by IMF member countries for which they may
be exchanged.