1. Reserve currency...
IMF co-ordinates various currency ` and exchange rate-related issues, and ensures smooth flow of cross border transactions. To overcome shortages after the collapse of gold standard in 1969 it came up with SDRs. Its value is derived from a basket of currencies which were held in large quantities by governments and central banks across the world.
2. What does it mean for a currency to get into the SDR basket?
They are ` considered safe haven currencies and are commonly used for global transactions with majority of countries accepting them.
The SDR basket comprises the US dollar, the British pound, the euro and the Japanese yen. Over the years the dollar has emerged as the most prominent currency in the basket accounting for more than 50% of the weightage in the basket.
3. Why is the Chinese Yuan included in it now?
The Chinese yuan is the fourth most-used in global payments with 2.79% share in August, says global payments facilitating firm SWIFT. It also accounts for more than 10% of global trade. Though it does not meet a major criteria by IMF, of being a freely-traded currency , China is being allowed.
4. What does the entry give China?
This will herald China's arrival on the global stage and help Chinese companies raise money . More funds could flow into China in the near term. The move will also help stem outflows.
5. Is there a responsibility for China?
The Communist country will be un der constant pressure to open up its financial markets which are heavily restricted. Also, more of its trade needs to be transacted in Yuan. If it does not open up, it faces a Japan-like risk which joined the basket, but remained a minor partner. The then Deutsche Mark gained currency since Germany liberalised its financial markets.
6. Where do the markets go?
IMF admission does not necessarily mean that it gains entry into global indices like MSCI, or other bond indices. But currency movements determined by market can cause extreme volatility .
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