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The International Monetary Fund (IMF) announced that China’s Yuan (or renminbi) will become a world reserve currency, a reliable and well-used foreign-exchange assets that central banks stock as a buffer against crises. The renminbi joins the dollar, euro, pound, and yen as part of the IMF’s reserve currency basket, which is also called as SDR (Special Drawing Right).
What is SDR
Special drawing rights are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). Their value is based on a basket of key international currencies reviewed by IMF every five years. it is a virtual currency whose value is currently based on the yen, euro, pound and dollar. IMF uses it for emergency lending to its members. While SDR is not a freely traded currency, it serves as an international reserve asset. The IMF issues its crisis loans valued in SDRs, which came in handy during the financial crisis when it helped bolster member nations’ official reserves. The Chinese currency will have a weight of 10.92 percent in the basket. It is lower than the dollar's 41.73 percent and 30.93 percent for the euro but above the Japanese yen's 8.33 percent and British pound's 8.09 percent. The addition will take effect on October 1, 2016. Currently the weights of the dollar, euro, pound and yen are 41.9 percent, 37.4 percent, 11.3 percent and 9.4 percent respectively.
Why this move:
What are the challenges ahead of China?
Impact on India: China is the second largest trade partner of India. So, SDR denominated in Yuan will help India to reduce the demand dollars and can help in maintaining the value of rupees to some level without much volatility. Also, as a part of BRICS initiative of contingency reserve fund, these countries as agreed for currency swap in Balance of Payment crisis. So inclusion of India in SDR will benefit India in Balance of Payment crisis, as well as it can leverage the facility of currency swap.
It appears to be a diplomatic victory for the People's Bank of China that the Chinese Yuan will be a part of an elite basket of reserve currencies, but this would come with significant short term challenges for the PBOC (People's Bank of China) in terms of more disclosures and market pressure. Many market participants appear to be less excited about it.
Dialing………..Mains (General Study Paper II: Effect of policies and politics of developed and developing countries on India’s interests)
Ques 1: Entry of yuan into SDR basket is a diplomatic victory for People's Bank of China, but this would come with significant short term challenges . Is there any impact on India from this move? Discuss
By: Vishal ProfileResourcesReport error
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