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Home / Economy / How  do  SDRs  help maintain balance of payments?

How  do  SDRs  help maintain balance of payments?

Of the accretion of $31.2 billion in July-September 2021 in foreign exchange reserves, $17.86 billion was by way of Special Drawing Rights (SDR) support received from the International Monetary Fund (IMF) on 23 August 2021

Of the accretion of $31.2 billion in July-September 2021 in foreign exchange reserves, $17.86 billion was by way of Special Drawing Rights (SDR) support received from the International Monetary Fund (IMF) on 23 August 2021. Mint explains

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Of the accretion of $31.2 billion in July-September 2021 in foreign exchange reserves, $17.86 billion was by way of Special Drawing Rights (SDR) support received from the International Monetary Fund (IMF) on 23 August 2021. Mint explains:

Of the accretion of $31.2 billion in July-September 2021 in foreign exchange reserves, $17.86 billion was by way of Special Drawing Rights (SDR) support received from the International Monetary Fund (IMF) on 23 August 2021. Mint explains:

Why were SDRs created by the IMF?

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Why were SDRs created by the IMF?

SDRs, created by the IMF in 1969, are an international reserve asset and are meant to supplement countries’ reserves. Adding SDRs to the country’s international reserves makes it more financially resilient. Providing liquidity support to developing and low-income countries allows them to tide over the balance of payments (BOP) situations like the one India has been experiencing due to the pandemic and the one it faced earlier in 1991. SDRs being one of the components of foreign exchange reserves (FER) of a country, an increase in its holdings is reflected in the BOP.

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What are the key components of BOP?

The BOP divides transactions of a country with the rest of the world into two accounts: the current account and the capital account. The current account consists of net trade of exports and imports of products and services, net earnings on cross-border investments and net transfer payments. The capital account constitutes a country’s transactions in financial instruments i.e. assets and liabilities constituting of direct investment, portfolio investment, loans, banking capital, and other capital. International reserves and IMF transactions are also a key component of the BOP.

What has been India’s BOP position in recent years?

In the July-September 2021 quarter, India’s current account slipped into a deficit of $9.58 billion as against a surplus of $6.57 billion in the April-June 2021 quarter. In the January-March quarter of FY20, the country’s current account had recorded a surplus on the back of a higher decline in imports.

What does the SDR support signify?

Countries worldwide are going through one of the worst health and economic crises, and India has been no exception. The present support of $17.86 billion in August 2021 by way of SDR has helped cushion the worsening current account deficit. It is also indicative of the fact that the domestic business environment is failing to attract foreign direct investment. This might also point to external factors such as the US Federal Reserve’s plans to increase interest rates, which make FPIs move away from host countries such as India.

Is dependence on SDR a matter of concern?

A BOP dependent on an SDR-dependent capital account surplus to cushion the country’s widening current account deficit is not a comfortable position to be in. Importantly, IMF support comes with a baggage of conditions as was the case in 1991—the support came with the condition that India initiate big ticket economic reforms. Any democratic country would be more comfortable with sovereign rights to design its policy strategy.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

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