Know about SDR

Last week IMF Chief Christine Lagarde announced that the bank’s staffers had voted in favour of the Chinese renminbi (yuan) being ushered[ú-shu(show,दिखाना)] into the select club of currencies that make up the IMF’s Special Drawing Rights (SDR) basket. Market experts say the yuan’s entry into SDR is now a done deal. They predict this will be a watershed[wo-tu,shed(historical event,ऐतिहासिक घटना)] moment for global markets.

the IMF is a lender of last resort for its member nations. The SDR is a reserve fund that functions as an emergency reserve to supplement the forex coffers of member nations. IMF members are allocated SDRs and can borrow against them in case of a cash crunch.

The SDR reserve is made up of four major currencies — the US dollar, the euro, the Japanese yen and the British pound. L No new currency has made it to the SDRs since the euro in 2001. The inclusion of the yuan would, therefore, represent a public acknowledgement by the IMF that China, a developing nation, has arrived on the global stage.

Now IMF have a third choice — the yuan. They may choose to buy the yuan to diversify forex reserves, ending the dollar’s hegemony[hi'je-mu-nee(dominance,प्रभुत्व)].

Two, the yuan’s entry into SDR would be a pretty capacious[ku'pey-shus(big,बड़ा)] boost for China’s prestige globally. After all, this would be an open acknowledgement by the Western world that the Chinese government is loosening its iron grip on the economy and is willing to take steps towards free markets.

China’s reputation for being reformist and market-oriented has taken a fair beating of late, after its knee-jerk[nee-jurk(natural,स्वाभाविक)] moves to halt its August stock market rout by pulling up brokers for shorting stocks, suspending trading in large swathes[sweydh(strip,पट्टी)] of stocks and attempts to ‘talk up’ markets. But China’s decision, also in August, to allow the renminbi to ‘float’ just a tiny bit, seems to have convinced the IMF that it is SDR-worthy.

Three, the yuan could come to be used more widely in global trade transactions and borrowings. Today, the dollar leads that race by a mile; 43 per cent of international payments are settled in dollars and 28 per cent in euros, the yuan at a distant 2.4 per cent.

If you’re a big buyer of Chinese mobile phones, electronics and toys, prepare to shell out a little more for these products in the long run. However, given its large forex reserves, the Chinese central bank is expected to step in to arrest currency volatility

Download monthly pdf of October