Home / News / India /  Fresh SDR allocation may bump up forex reserves

India’s forex reserves may shoot up on Monday with the International Monetary Fund (IMF) crediting additional special drawing rights (SDRs) in the accounts of each country as part of its $650 billion global liquidity push. India is likely to receive around $17.94 billion based on its existing quota in the IMF.

India had SDRs worth $1.54 billion out of its total forex reserves of $619.4 billion as of 13 August, according to the latest Reserve Bank of India (RBI) data. However, on account of India’s 2.76% quota at the IMF, India may receive $17.94 billion out of the $650 billion fresh SDR allocation taking the country’s total SDR to $19.48 billion.

SDR is an international reserve asset created by the IMF, comprising the dollar, euro, yen, sterling, and yuan, and allocated to its members in the proportion of their quota. One SDR is currently valued at $1.416.

A fresh SDR issue is expected to help the least developed and developing countries facing a foreign exchange crunch because of the coronavirus pandemic. However, the move has recently drawn criticism from many economists as it would lead to skewed allocations towards developed countries who need it the least, with the US, EU and UK alone receiving nearly half of the new liquidity. In contrast, low-income countries are expected to receive only about $21 billion worth of liquidity.

Arvind Virmani, a former India representative to the IMF and former chief economic adviser in the finance ministry, said fresh SDR allocation makes little difference to India though it is free money. “It’s not part of the consolidated fund of India. It goes into the RBI’s balance sheet on the credit side of the ledger. When RBI buys foreign exchange, its rupee balance sheet goes down. But in this case, RBI does not have to pay anything for the SDRs," he explained.

On its website, IMF said once allocated, members can hold their SDRs as part of their foreign exchange reserves or sell or use part or all of their SDR allocations. “Members can exchange SDRs for freely usable currencies among themselves and with prescribed holders. Such exchange can take place under a voluntary arrangement or under a mandatory designation plan on members with sufficiently strong external positions, which serves as the ultimate backstop for the SDR market. Since 1987, the SDR market has functioned through voluntary arrangements without the need to activate the designation plan. IMF members can also use SDRs in a range of other authorized operations among themselves (loans, payment of obligations, pledges) and in operations and transactions involving the IMF, such as the payment of interest on and repayment of loans, or payment for quota increases," it said.

India initially opposed the idea of general allocation of SDR but softened its stand at the last minute at the last G20 meeting, giving the go ahead to the proposal. India has an “open mind" on the matter, though the general allocation of SDR is not a substitute for structural quota and governance reforms, Union finance minister Nirmala Sitharaman said at the 43rd meeting of the International Monetary and Financial Committee on 8 April. “We observe that SDR allocations are asymmetrical, with as much as 62% going to advanced economies and only 3% to LICs (low-income countries). Given this, why not then proceed with a limited SDR allocation targeted at LICs? We are open to discussions on the deployment of SDRs for LICs to support healthcare and economic recovery. Priority should be accorded to modalities for channelling existing stocks of SDRs to LICs on principles that are just and have traction with the entire membership," she said.

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