By Ruma Dubey

While a lot of storm was being kicked up all over the world about Paris Summit on Climate Change, a quiet pleasant wind blew over China. It is after a long time that we saw some good news come forth for this country, which is going through some tough times.

The IMF included the Chinese currency, Yuan or Renminbi in the very prized basket of SDR. For most of us here in India, SDR probably means Strategic debt restructuring as we are caught up in that cycle. But on a global scale, which has more relevance, SDR stands for supplementary foreign exchange reserve assets. This is like a reserve maintained by the IMF and its value – which currency to hold, in what percentage, is decided by the IMF. It reviews this basket and its composition of international currencies, once in every five years.  This is a virtual currency, something which it knows it can draw upon if needed to its members and countries.

So when IMF announced that Yuan is to be included in the SDR, effective 1^st Oct 2016, what it means is that yuan will gain status of a true international currency and it is recognition of Yuan’s rising status, along with China in the arena of global finance.

IMF did not specify the exact weightage of the Yuan in the SDR basket but it widely stated to be at 10.92% v/s expected 14-15%. This is a HUGE step forward for China. As per the current weightage, US Dollar leads with 41.73% (down from earlier 41.90%), Euro comes close on its heels at 30.93% (down significantly from 37.40%). The Japanese Yen weightage is at 8.33% (down from 9.4%) and Pound Sterling is at 8.09% (down from 11.30%). This means that Yuan at 10.92% is valued much higher than the Japanese and the British currency.

Many argue that it is a politically motivated decision, very symbolic, to include Yuan and that too after much lobbying. But what is significant is that Yuan was considered to be relevant enough to be there. Acceptance in the SDR means that Yuan should have a demand, like the other currencies and the liquidity. And for that to happen, China will have to now work really hard on how it boosts demand for its currency. For a currency which is in the tight grip of the Govt and where doors to its financial system are not wide open, doing this will be a big task. With no policy transparency and no faith of any data which comes out, how can one use yuan as a preferred international currency?

Yes, the Yuan inclusion could see around $30-40 billion foreign demand for yuan denominated assets. But whether it will lead to structural changes and bring about transparency; that’s a tall order. The Yuan is not even fully convertible, so what SDR status are we really talking about? This was all about a prestige issue, of getting the Yuan into the SDR - it’s there now but it seems doubtful that China will toe the line when it comes to loosening financial regulations. Thus as most analysts around the world say – It was all about getting into the SDR, that’s it! There is a 0% chance of Yuan becoming a true reserve currency anywhere in the next three years.

And India? Where are we when it comes to SDR? Usually, we like to say India and China in a single breath, so wonder what happened. How come no speeches on getting the Indian rupee as SDR status?

Its good that we are rooted in reality. Our exports don’t figure out anywhere in the top and for the past 11 consecutive months, it has been falling. The Indian Rupee is nowhere in demand except in India. So let’s not fool ourselves into thinking that we can even consider being in the SDR basket. Maybe five years later, if we achieve even 50% of what we have planned, then maybe, we too can lobby for putting the Rupee into the SDR basket. Till then, let us just hope that the rupee does not slide further…