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SDR
The Special Drawing Rights (SDRs) are basically a combination (weighted aver-
age) of multiple currencies. This means that the International Monetary Fund
(IMF) has its own reserve which has multiple currencies. Based on the value of
these reserves, the IMF creates and distributes Special Drawing Rights (SDRs).
A member country participating in SDR is free to use its holdings to meet the
deficit in the balance of payment.
The SDR are required by the member countries to meet the requirement of in-
ternational liquidity through credit creation of the bank.
Features
1. The allocation of SDRs was on the basis of quota system held by the individ-
ual member country.
2. Special Drawing Rights have been created under Special Drawing Account.
3. SDRs have been created to maintain the confidence of the people.
4. SDRs are used by a participant country to remove the deficits in the balance
of payment.
At present, there was three ways of using SDRs by the member countries:
1. To obtain US—Dollars, French—France or pound Sterling from member coun-
tries of provide currency in exchange for SDRs.
2. To use SDRs for obtaining balance of its own currency held by another par-
ticipant by agreement with concerned participant.
3. To use SDRs to effect repurchases and pay charges in the Fund’s General Ac-
count.
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SDR Works on a voluntary basis :-
Various Fund members and one prescribed SDR holder have agreed to stand
ready to buy and sell SDRs on a voluntary basis.
The Fund facilitates transactions between members seeking to sell or buy SDRs
and these counterparties to the voluntary agreements that effectively make a
market in SDRs.
In the event that there are not enough voluntary buyers of SDRs, the IMF can
designate members with strong balance of payments positions to provide
freely usable currency in exchange for SDRs. This so-called "designation mech-
anism" ensures that a participant can use its SDRs to readily obtain an equiva-
lent amount of currency if it has a need for such a currency because of its bal-
ance of payments, its reserve position, or developments in its reserves.
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Currency Convertibility
Currency convertibility means the ease at which a country can convert its cur-
rency into gold or any other store of value. When a country has poor currency
convertibility, meaning it is difficult to swap it for another currency or store of
value, it poses a risk and barrier to trade with foreign countries who have no
need for the domestic currency.
India’s stand
India's rupee is a partially convertible currency—rupees can be exchanged at
market rates in certain cases, but approval is required for larger amounts.
Until the early 1990s, anyone willing to transact in a foreign currency would
need permission from the RBI. People wanting to go abroad, import products or
even go abroad for studies were all required to go through the RBI. All such
transactions happened at a pre-fixed rate which was decided by the RBI.
After LPG reforms in 1991, many changes took place which changed the way
foreign exchanges took place. Exporters and importers were allowed to ex-
change foreign currencies for the trade of unbanned goods and services, there
was easy access to forex for studying or traveling abroad, and a relaxation on
foreign business and investments with minimal restrictions depending on the
industry sectors.
However, currently, Indians still need to get an approval from RBI if they want
to invest money abroad over a certain limit. Similarly, foreign investments in
certain sectors are still capped and require approval from the RBI before they
take place.
Recently, the RBI allowed foreign exchange settled derivative trading in Inter-
national Financial Service Centres. It also allowed banks to offer non - residents
both rupee accounts without time limits and foreign exchange.