A case for the rupee in the SDR basket

“I favour extending the SDR basket to include the R-currencies — the renminbi, rupee, real, rand and rouble — with the addition of gold.”

This was Lord Meghnad Desai, Emeritus Professor London School of Economics, expressing his views in his report Gold, the Renminbi, and the Multi-Currency Reserve System released in January 2013 by OMFIF (Official Monetary and Financial Institutions Forum) in conjunction with the World Gold Council.

The Special Drawing Rights or SDR is an international reserve asset created by the International Monetary Fund in 1969 to support the Bretton Woods’ fixed exchange rate system.

As the supply of two key reserve assets, gold and the US dollar proved inadequate for expansion of world trade and economic development that was taking place, the international community decided to create a new international reserve asset under the auspices of the IMF. The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold, which at that time, was equivalent to one US dollar.

After the collapse of the Bretton Woods fixed exchange system in 1971, the SDR was redefined as a basket of certain select currencies.

The US dollar value of the SDR is calculated as the sum of the specific amounts of four currencies valued in US dollars, on the basis of exchange rate quoted at noon each day in the London market. It has limited uses such as determination of fees by the International Postal Union and as a spin-off, to determine the roaming charges for the mobile telephones in certain regions except Europe.

The SDR basket of 16 currencies from 1974 to 1980 was replaced in 1981 by a basket of currencies that included the US dollar, the Deutsche mark, the French franc, the British pound, and the Japanese yen. After the euro was in place in January 1999, the SDR basket included only four currencies: the dollar, the euro, the pound and the yen.

On November 30, 2015, Christine Lagarde, the managing director of the IMF, announced the inclusion of the Chinese currency, the yuan, in addition to these four reserve currencies in the SDR basket with effect from October 1, 2016.

Manipulators of currencies should have no place in the SDR basket. Both Japan and China have manipulated their currencies to boost their exports. In 1985, the Japanese yen at 220 to a US dollar had almost killed the US auto industry and it was only after President Ronald Reagan imposed import quotas on Japanese cars, that the yen rose to 120 to a dollar.

Had the IMF expelled the Japanese yen from the SDR basket in its 1986 review, China could not have possibly staked its claim to include its currency in the basket.

With the end of recession and consequent recovery since March 2009, all the emerging economies in Asia witnessed surging capital flows, causing significant appreciation of their currencies, with the Brazilian real and the Korean won gaining 42 per cent and 36 per cent respectively against the yuan.

China, which had emerged as the third largest economy after the US and Japan and had surpassed Germany as the largest exporting nation, had chosen to peg its currency at 6.63 yuan to a dollar since July 2008 from 8.28 yuan to a dollar since 1996.

Since the Chinese currency has been included in the SDR basket, several other countries such as Australia, Canada, Singapore and Switzerland are likely to press their claims for inclusion of their respective currencies, too.

India is one of the leading emerging markets in the world and has built up huge reserves of $3,60,250 million — more than that of countries currently in the SDR basket, namely, Germany ($1,63,514) million, France ($1,36,150) million and the UK ($1,54,351 million).

India’s record of its exchange rate management has been quite clean and its reserves and exports have been doing quite well. Its inflation rate came down to 3.59 per cent in July 2015 (currently 4.83 per cent) from an all-time high of 11.18 per cent in November 2013.

India has also been moving in the direction of full capital convertibility since the last ten years.

In the event of the SDR being further expanded to include more currencies, there is enough justification to consider including the Indian rupee as well in the SDR basket.

The writer was with the IMF in Washington