India and China will aggressively pitch for inclusion of the yuan (renminbi) and the rupee in the special drawing rights (SDR) basket of currencies with International Monetary Fund (IMF).

SDRs are special foreign reserves other than gold and dollar that member countries can maintain with underlying values determined by dollar, euro, yen and British pound.

“While the next review on SDRs is expected in 2015, both India and China may press for earlier inclusion of their respective currencies in the SDR basket,” a finance ministry official told Financial Chronicle without wanting to be identified. Inclusion of the yuan and the rupee in the SDR basket of IMF figured at the recent comprehensive economic dialogue held by India and China at Beijing last week.A joint move on the issue will figure when Zhang Ping, chairman of China’s National Development and Reforms Commission (NDRC) visits India shortly to take forward the economic dialogue. Ping will visit India at the invitation of the deputy chairman of planning commission Montek Singh Ahluwalia.

Inclusion of their respective currencies in the SDR basket will allow the two countries to widen their international financial settlements in local currencies. It will also allow the two sides to make their currencies more acceptable in trading of goods and services globally.

“We have to begin the pitch now for inclusion of the rupee in the SDR basket, delinking it from the US greenback, though it will take some time before it can actually happen,” the finance ministry official quoted earlier said.

This will be the first time for India to pitch for the rupee’s inclusion in the SDR basket of currencies. Besides the Chinese renminbi, India is likely to face stiff competition from other emerging Brics partners making similar pitch. Russia’s rouble (RUB), South African Rand (R) and the Brazilian currency Real (R$) will also be in the reckoning.

IMF has already hinted that sooner or later it was willing to broaden the basket of SDR currencies to reflect the growing clout of emerging countries based on certain criteria “that were fit and proper”.

Some of those criteria include making the proposed currency convertible on capital account as well as the participating country having deep and liquid financial markets along with stability and acceptability of the currency.

India held SDR 2,883.97 million as on August 31, against an allocation of SDR 3,978.26 million by IMF that has accumulated over the years. Similarly, China holds SDR 7,698.60 million against an allocation of SDR 6,989.67 million. As on October 5, each SDR was valued at Rs 76.584. However, the corresponding value for Chinese yuan is not available.

Created in 1969 to supplement any possible shortfall in preferred foreign exchange reserve assets, namely gold and the US dollar, the value of SDR is at present linked to the weighted average values of euro, US dollar, Japanese yen and British pound. SDRs are allocated to countries by the IMF as per their respective voting shares. As of March this year, SDRs in existence are 238.3 billion. This is likely to go up to SDR 476.8 billion by 2013.

SDRs are interest-earning reserves with rates determined by IMF every week and can be traded among countries. The allotment of SDRs is done in relation to the equity held by a member-country in IMF. A currency’s importance is currently measured by the degree to which it is used as a foreign exchange reserve asset and value of exports denominated in that currency.

“There is no reason why the yuan (RMB) and the rupee should not be considered for inclusion in SDR basket preferably delinking them from the US dollar,” Montek Singh Ahluwalia recently told reporters at an impromptu briefing on the sidelines of an ICRIER summit.

Adarsh Kishore, former finance secretary who served as executive director at IMF told Financial Chronicle on Sunday, “The Indian rupee has the potential to be considered as part of the SDR currencies basket given India’s growing economic clout, larger engagement on global economic scene and a bigger role it is tipped to play in IMF and World Bank.”

With the Indian economy touching $ 1.79 trillion, and a targeted $500 billion exports over next two to three years and foreign exchange reserves of over $311 billion, the rupee’s inclusion in the SDR basket looks a fit case.

Advantages attached to rupee’s inclusion in the SDR basket notwithstanding, there may also be some pitfalls. Given the fact that poorer nations access SDR reserves in emergencies, India should be willing to take on the fiscal and monetary burden of these countries to an extent. Further, it must be willing to run structural deficits — both fiscal and current account deficits as a consequence, warned old hands at IMF.

What are the prospects of Indian rupee’s inclusion into SDR basket? Adarsh Kishore was sceptical and said, “It may not happen in the medium term.” But, the pitch is worth it, he conceded. A detailed questionnaire on the issue mailed to India’s representative at IMF Arvind Virmani did not elicit any response.

Inclusion of the rupee would not only enhance its acceptability among IMF member-countries but would deepen the market for rupee leading to discovery of its true value apart from opening up new trade opportunities.

Though the Chinese economy is much larger with its reserves and exports many times more than India’s, its restrictive currency regime may act as a dampener against its inclusion, Indian officials told Financial Chronicle.

The limiting factor in this campaign for making rupee SDR inclusive is that all decisions at the IMF are made with 85 per cent voting membership supporting a proposal and US enjoying the veto-power.

Against this backdrop, a recent decision of central bank governors of China, India, Brazil, Russia and South Africa to settle their trade and investment transactions in local currencies without involving the dollar or euro assumes significance.

In April 2011, G-20 finance ministers and central bank governors had agreed to work on broadening the composition of the SDR currency basket.

A European think tank, Bruegel, and CEPII, France’s main centre for study on international economics, have presented alternative scenarios in their latest publication, ‘Global currencies for tomorrow: a European Perspective’.

One scenario that has been projected is emergence of regional economic groupings that include currencies of major emerging economies to play a larger role in a ‘multi-polar’ currency order.

Inclusion of currencies like the yuan or the rupee in the SDR basket becomes significant as value of these international reserves may set benchmark for exchange rates of a host of currencies, commodities prices and even in invoicing energy products like crude on SDRs.