How do SDRs help maintain the balance of payments?

Of the $31.2 billion July-September 2021 increase in foreign exchange reserves, $17.86 billion came from Special Drawing Rights (SDR) support received from the International Monetary Fund (IMF) on August 23, 2021 Mint explains:

Why were SDRs created by the IMF?

SDRs, created by the IMF in 1969, are an international reserve asset and are intended to supplement countries’ reserves. Adding SDRs to the country’s international reserves makes it more financially resilient. Providing liquidity support to developing and low-income countries enables them to weather Balance of Payments (BOP) situations like the one India experienced due to the pandemic and the one it faced earlier in 1991. Since SDRs are one of the components of a country’s foreign exchange reserves (FER), an increase in its holdings is reflected in the balance of payments.

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The gap is widening (Mint)

What are the key components of BOP?

The balance of payments divides a country’s transactions with the rest of the world into two accounts: the current account and the capital account. The current account includes net exchanges of exports and imports of goods and services, net gains on cross-border investments and net transfer payments. The capital account represents a country’s transactions in financial instruments, that is, the assets and liabilities constituting direct investment, portfolio investment, loans, bank capital and other capital. International reserves and IMF transactions are also a key component of the balance of payments.

What has India’s balance of payments position been in recent years?

During the July-September quarter of 2021, India’s current account slipped to a deficit of $9.58 billion from a surplus of $6.57 billion during the April-June quarter of 2021. During the January to March quarter of FY20, the country’s current account had recorded a surplus thanks to a sharper drop in imports.

What does SDR support mean?

Countries around the world are going through one of the worst health and economic crises, and India was no exception. Current support of $17.86 billion in August 2021 in the form of SDRs has helped cushion the worsening current account deficit. It also indicates that the domestic business environment does not attract foreign direct investment. It could also point to external factors such as the US Federal Reserve’s plans to raise interest rates pushing REITs away from host countries such as India.

Is DTS addiction a concern?

A balance of payments dependent on a capital account surplus dependent on the SDR to cushion the country’s growing current account deficit is not a comfortable position. provided that India launches major economic reforms. Any democratic country would be more comfortable with sovereign rights to design its political strategy.

Jagadish Shettigar and Pooja Misra are faculty members of BIMTECH.

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