India and IMF

India’s recourse to the IMF was limited during the period 1945 to the 1980s. Before the First Five Year Plan, India borrowed a moderate amount of SDR 100 million under the lower tranche (generally up to 50% of the quota). During the Second Five year Plan period to cope up with the problem of balance of payments, an amount equivalent of SDR 200 million was borrowed from the IMF. During the Third plan period India encountered severe balance of payments problem and hence borrowed a higher amount of SDR 375 million from the fund. During 1965 and 1968, the balance of payments situation worsened and India devalued its currency and sought IMF assistance to the tune of SDR 415 million, including SDR 90 million under the compensatory Financing facility.

The next time India approached the IMF was during 1973-74, when India was affected by the first oil shock and hence borrowed SDR 775 million, including SDR 200 million under the Oil Facility. Then again during July 1978 and December 1980, India made use of Trust Fund amounting to SDR 529 million.

In the early 1980s, to finance the huge current account deficits, India entered into three year Extended Arrangements with the IMF for SDR 5 billion in November 1981, but India availed of only SDR 3.9 billion and the balance of SDR 1.1 billion was surrendered.

The oil price hike in 1989 and the Gulf war widened India’s current account deficit forcing Indian to borrow SDR 2,208 million under Stand-by arrangements and SDR 1,352 million under CCFF. These loans have now been repaid

Special Drawing Rights (SDRs):

SDR is an international reserve asset created by the Fund as supplement to the existing reserve assets. As SDRs are not backed by any assets they are also known as paper gold. They were first allocated to all member countries of the IMF in 1970-72 on the basis of the then existing quotas, total allocation being SDR 9.3 billion. To strengthen the resources of the Fund, SDR allocation were again made in 1979-81 to the extent of 12.12 billion. The total allocations now amount to SDR 21.42 billion. In 1970, the value of an SDR was equal to US $ 1 which was maintained till July, 1974 when it was decided to value the SDR on the basis of a basket of 16 currencies. From January 1, 1986, the basket was reduced to currencies and effective January 1, 2001, the amount of currency units in the SDR valuation basket and the weight of each to be used to calculate the amount of each of these 5 currencies in the basket will be as follows:

US Dollar 0.5770 45%
Euro 0.4260 29%
Japanese Yen 21.0000 15%
Pound 0.0984 11%

The value of SDR in US Dollar terms is calculated daily by the IMF. On August 15, 2001, one SDR was equal to US $ 1.28.

Due to the sharp depreciation in the value of the US dollar, SDR has now emerged as a standard of value. It is the unit of account for Fund’s transactions. It is also finding increasing acceptance as a unit of account for private contracts and international treaties and for use by many international and regional organizations.

Members designated by the Fund are obliged to accept SDRs up to the point when their holding of SDRs increase to 3 times their allocation. There is an important reason why members are willing to accept SDRs they earn an interest determined weekly on the excess of their holdings over their original allocations. The Fund has prescribed 14 institutions as others holders of SDRs. Other holders can acquire and use SDRs in transaction and operations by agreement with participants and other holders under the same terms and conditions as participants. They cannot, however, receive allocations of SDRs.

Countries having a deficit can utilize their SDRs up to 85% of their holdings for (i) obtaining foreign currency, (ii) to redeem balances of their own currencies held by other member-countries, and (iii) to meet their obligations to the Fund, viz., repayment of interest charges. Countries having less SDRs than allocated would have to pay interest (determined weekly by the Fund).

SDRs may now be freely transferred, by agreement between participants, in transaction and operation that include purchases ad sales of SDRs. SDR has also been used as a currency peg.

The question of fresh allocation of SDRs is very often pressed by developing countries on the following grounds: (i) international liquidity constraints prevent a general expansion in world trade and production, (ii) a new issue of SDRs will provide adequate resources to the countries in debt to maintain imports and provide further impetus to the growth of world trade, and (iii) developing countries are not in a position to borrow at commercial terms. However, the degree of required support for a fresh SDR allocation is still lacking.