Context

India will not support a general allocation of new ‘Special Drawing Rights’ by the International Monetary Fund as it might not be effective in easing coronavirus-driven financial pressure.

About

• The Special Drawing Rights (SDR) is an international reserve asset, created by the International Monetary Fund in 1969 to supplement its member countries’ official reserves.
• The SDR serves as the unit of account of the IMF and some other international organizations.
• The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.
• The value of the SDR is based on a basket of five currencies:
  • the U.S. dollar
  • the euro
  • the Chinese renminbi
  • the Japanese yen
  • the British pound sterling
    
    

Background:

• The SDR was created as a supplementary international reserve asset in the context of the Bretton Woods fixed exchange rate system.
• The collapse of Bretton Woods system in 1973 and the shift of major currencies to floating exchange rate regimes lessened the reliance on the SDR as a global reserve asset.
• Nonetheless, SDR allocations can play a role in providing liquidity and supplementing member countries’ official reserves, as was the case amid the global financial crisis.

Why India is opposing SDR allocation?

• The new SDR allocation would provide all 189 members with new foreign exchange reserves with no conditions.
• Such a major liquidity injection could produce potentially costly side-effects if countries used the funds for “extraneous” purposes.
• In the current context of illiquidity and flights to cash, the efficacy of an SDR allocation is not certain.
• Currently, most countries rely on national reserves as a first line of defense.
• Consequently, extraneous demands for these reserves, not related to domestic monetary and financial stability, would be costly, and hence cannot be supported.

About IMF:

• The International Monetary Fund (IMF) was conceived in July 1944 at the United Nations Bretton Woods Conference in New Hampshire, United States. 
• The IMF promotes international financial stability and monetary cooperation.
• It also facilitates international trade, promotes employment and sustainable economic growth, and helps to reduce global poverty.
• The IMF is governed by and accountable to its 189 member countries. It is accountable to its member country governments.