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Kevin P. Francis Dhanya.M.
SDRs are allocated to member countries in proportion to their IMF quotas. as it is not backed by any currency or precious metal. Used only among governments of member countries and IMF for balance Of payments settlements. created by the IMF in 1969.What is SDR? The SDR is an international reserve asset. . Also called paper gold.
.Definition The SDR is neither a currency. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: ± Through the arrangement of voluntary exchanges between members ± By the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. nor a claim on the IMF. Rather. it is a potential claim on the freely usable currencies of IMF members.
Why was SDR created? To support the Bretton Woods fixed exchange rate system. . The dominant constituents of international reserves are: ± Government or central bank holdings of gold ± Widely accepted foreign currencies (USD) Inadequacy of these two key reserve assets. led to creation of a new international reserve asset under the auspices of the IMF.
in time.Why was SDR created? Triffin dilemma ± US Dollar was the world's principal foreign exchange reserve asset ± A deficit is necessary for the United States to supply world demand for its Dollars ± A deficit will. lessen the value of the Dollar and endanger the entire system .
. SDR denominated bank deposits and loans have been offered in private financial markets. By paying the reserve tranche.Uses of SDR For balance of payments settlements among the members Used for transactions with fund for eg.
S. It is calculated as the sum of specific amounts of the four currencies valued in U. dollar The U. dollars. SDR was redefined as a basket of currencies Basket consists of: ± ± ± ± Euro Japanese yen Pound sterling U.S. After the collapse of the Bretton Woods system in 1973. on the basis of exchange rates quoted at noon each day in the London market. .888671 grams of fine gold = one U.S.S.SDR Valuation: The value of the SDR initially defined as 0. dollar. dollar-value of the SDR is posted daily on the IMF's website.
. ± The amount of reserves denominated by the currencies of member countries. revision was made based on ± The value of the exports of goods and services. The next review will take place in late 2010.) The basket composition is reviewed every five years by the Executive Board Most recent review (in November 2005). .SDR Valuation:(contd.
. Is based on a weighted average of representative interest rates on short-term debt in the money markets of the SDR basket currencies. The SDR interest rate is determined weekly.SDR Interest Rate The SDR interest rate provides the basis for calculating: ± Interest charged to members on regular (nonconcessional) IMF loans ± Interest paid and charged to members on their SDR holdings and charged on their SDR allocations. ± Interest paid to members on a portion of their quota subscriptions.
i.0467 0.01512 0. . IMF specifies that the SDR interest rate for each weekly period commencing each Monday shall be equal to the combined market interest rate as determined by the Fund.e.4100 18.S. 2010.3878 0. expressed as an equivalent annual bond yield.6320 Exchange rate Interest Rateagainst SDR-(B) (C) 0. 2. Pound U. Interest rate on the financial instrument of each component currency in the SDR basket.5100 0.39 1.0903 0.0649 0.0156 0.880587 0.K. SDR per currency rates are based on the representative exchange rate for each currency. Currency Euro Japanese Yen U. 3.4000 0.1600 Total: SDR interest Rate Product (A*B*C) 0.2606 0.64154 0. Dollar Currency amount-(A) 0.Interest Rate for the week Oct 04 Oct 10.11100 0.0076832 1.7219 0.
it earns interest on the excess If it holds fewer SDRs than allocated.SDR allocations to IMF members Allocation of SDR is based on the proportion IMF quotas of the members. . it pays interest on the shortfall. If a member's SDR holdings rise above its allocation.
3 billion $ 12.1 billion $ 161.2 billion The allocation increased 74.Kinds of Allocation: 1. General allocations of SDRs. . 2009 Amount $ 9.13 percent of their quota. Decisions to allocate SDRs have been made three times. Period 1970-72 1979-81 August 7.
. Special allocations of SDRs A proposal for a special one-time allocation of SDRs was approved by the IMF's Board of Governors in September 1997.Kinds of Allocation:(contd.5 billion . It increased members' cumulative SDR allocations by SDR 21. Its intent is to enable all members of the IMF to participate in the SDR system on an equitable basis and correct for the fact that countries that joined the IMF after 1981 never received an SDR allocation. The Fourth Amendment became effective for all members on August 10. 2009.) 2.
members with sufficiently strong external positions are designated by the Fund to buy SDRs with freely usable currencies up to certain amounts from members with weak external positions. This arrangement serves as a backstop to guarantee the liquidity and the reserve asset character of the SDR. Under this mechanism.Buying and Selling of SDR: The IMF acts as an intermediary between members and prescribed holders to ensure that SDRs can be exchanged for freely usable currencies. .
Deficit of USD.Limitation of SDR: Dollar centered system: It gives too much importance to USD. .