Global focus turns to IMF's 2027 SDR review

Driven by economic growth, trade linkages and digital payment networks, India is strategically positioning the rupee for inclusion in the IMF's SDR basket

Special Drawing Rights (SDR) is an international reserve asset created by the International Monetary Fund (IMF) to supplement the official reserves of its member countries. It’s a synthetic currency created in 1969, with its original value initially expressed in gold until the end of the Bretton Woods monetary system. The SDR basket comprised sixteen currencies initially, downsized to five in 1981, reduced to four after the launch of the euro and expanded to five with the renminbi’s addition to the current list. 

 

The value of the SDR is a weighted average of a basket of currencies. While the US dollar’s dominant weight has remained stable, the euro, yen and pound sterling have witnessed weight reductions since 2000. This is linked to their role in international trade and finance. The SDR interest rate is a weighted average of the short-term interest rates of the SDR basket currencies.

 

G7 nations hold a controlling stake in the IMF, followed by China, India, Russia and Brazil. The United States has veto power and it’s the single largest shareholder. The IMF reviews the SDR basket every five years and the next review is due by July 2027. Only IMF member countries and a select list of 20 multilateral and international financial bodies, including the Asian Development Bank, can hold SDRs. 

 

There are two criteria for a currency’s inclusion in the SDR: (i) an “export criterion” comprising the value of exports of goods and services in the five years preceding the SDR review date and (ii) a “freely usable currency” criterion, meaning a currency is widely used in payments for international transactions and widely traded in international currency markets. Going forward, the IMF plans to limit the SDR to not more than five or six currencies. The question is: How will the criteria fare with rising global current account imbalances?

 

Each SDR currency must have a broad and deep foreign exchange market, including for hedging. The freely usable criterion is materially different from “free floating” and “fully convertible”. A possible new criterion mooted for SDR composition is to combine exports with international financial inflows and replace exports with market gross domestic product (GDP).

 

Besides the SDR, three additional reserve currencies exist for investment by central banks. These are the Canadian dollar, the Australian dollar and the Swiss franc. They got reserve currency status, backed by a big economy and developed capital markets. They denote a currency that investors can “trust,” especially during periods of stress, backed by market-determined predictable movements.

 

Will a new currency be added in the upcoming review? India is undertaking key steps in the internationalisation of the rupee. A working group of the Reserve Bank of India has suggested the inclusion of the rupee in SDRs. India’s current export-to-GDP ratio is 22 per cent compared with Japan and China at 21 per cent each and the US at 11 per cent. India’s trade linkages and export basket have a global footprint. India’s economic ascent and infrastructure investment-driven extraordinary GDP growth are making the rupee attractive. International appetite has grown for rupee masala bonds. The roadblock is the “freely usable” criterion.

 

India is a founding member of ‘Project Nexus’ at the Bank for International Settlements, which integrates its interoperable payment system with other country systems. India’s Unified Payments Interface has made inroads in 11 countries and is about to go live in 40-plus countries. It facilitates money transfers between residents, non-residents and offshore entities at minimal transaction costs. India’s multicurrency real time gross settlement system achieves payments in under 60 seconds.

 

Reserve diversification is gaining momentum. Despite tariffs and geopolitically driven structural shifts, the G7 will continue to play the largest foundational role in the SDR. Comprehensive Economic Partnership Arrangements (CEPAs) have become the preferred choice over free trade-driven currency flow arrangements. India’s priority is to have CEPAs in place with G7 nations.

 

Shifts in the global economy, international finance, market integration, shrinking central bank balance sheets, demand for reserves and global fragmentation will drive emerging SDR basket components. All eyes are now set on the mid-2027 SDR review.

 

The writer is a former senior staff of the Asian Development Bank, Philippines. The views expressed are personal