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Understanding SDRs or, Special Drawing Rights

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SDRs or, the Special Drawing Rights were established in 1969. It is a Monetary Reserve Currency established by the IMF or, the International Monetary Fund and utilised globally. It operates as a replacement for the IMF's member nations' current money reserves. It was created in response to worries about the constraints of using gold and dollars to settle international debts. The SDRs help to increase global liquidity by supplementing the conventional reserve currencies.

Understanding the SDRs or, the Special Drawing Rights - The IMF utilises SDRs as a fictitious currency and relies on them for internal accounting purposes. SDR is created from an assortment of prominent currencies from across the world. The IMF awards SDRs to its nations that participate to demonstrate their governments' complete trust and support. Every five years, the SDR is revalued. The SDR was created with the goal of becoming a prominent feature of international reserves. Gold and Reserve Currencies, on the other hand, would constitute a modest marginal component of such Reserves. To participate in the SDR system, a member nation must have access to official Reserves. The official reserve comprised of the central bank's or government's holdings of gold and internationally acknowledged foreign currencies. These might be used to purchase the native currency in foreign currency exchange markets in order to keep the exchange rate constant.

However, the worldwide supply of the two major Reserves, the US dollar and gold, was insufficient to support global trade development and the continuous financial activities. This deficiency pushed member nations to establish a global reserve asset under the supervision of the IMF. The SDR's value is determined by an indexed bundle of major currencies, which includes the US dollar, the British Pound, Yen, Chinese yuan and the Euro. Its worth is expressed in US dollars. The SDR Interest Rate (SDRi) is used by the IMF to calculate the interest rate levied on borrowings made by member nations from it. Members will also be compensated at the same rate for their remunerated creditor position in the IMF.

Working of SDRs - The SDR is neither a currency nor a claim on IMF assets. Instead, it is a potential claim against the IMF member countries' openly usable currencies. The Articles of Agreement of the IMF establish a freely useable currency that is widely utilised in international trade and frequently transacted within Foreign Exchange Markets. IMF member countries that have SDRs can exchange them for freely useable currencies in two ways. They can agree on voluntary swaps among themselves. Alternatively, nations with more stable economies or larger Foreign Currency Reserves may purchase SDRs from less-privileged country members in accordance with IMF recommendations.

Member nations of the IMF are able to borrow SDRs from its assets at low interest rates. It is usually done to improve their BoPs positions. The SDR serves as the IMF's unit of account in addition to serving as a supplementary Reserve asset.

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