Which of the following is/are treated as artificial currency?

1. International Reserve Assets and Liquidity (basic)

Imagine a country’s economy like a household. Just as a family keeps some cash or gold aside for emergencies or to buy things from shops that don't accept their local IOUs, a country maintains International Reserve Assets. These are high-quality, liquid assets held by a central bank (like the RBI) to settle international debts, back the national currency, and manage the Balance of Payments (BoP). In India, the RBI acts as the custodian of these reserves, ensuring they are managed with a focus on safety, liquidity, and returns Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.68. When a country faces a deficit—meaning it owes more to the world than it is receiving—the central bank steps in to sell these reserves to bridge the gap Macroeconomics (NCERT class XII 2025 ed.), Open Economy Macroeconomics, p.89.

One of the most unique components of these reserves is the Special Drawing Right (SDR). Created by the International Monetary Fund (IMF) in 1969, the SDR is often called an 'artificial currency.' However, it is important to understand that it is not a currency in the traditional sense—you cannot use it to buy goods in a market. Instead, it is an international reserve asset and a unit of account used by the IMF for lending and bookkeeping Indian Economy, Nitin Singhania (2nd ed. 2021-22), International Economic Institutions, p.514. It represents a potential claim on the freely usable currencies of IMF members, helping provide liquidity to the global financial system when standard reserves (like Gold or US Dollars) are in short supply.

The value of an SDR isn't fixed to a single metal or country; rather, it is determined by a basket of five major currencies that dominate global trade. This basket approach ensures stability. If one currency in the basket weakens, the others might stay strong, keeping the SDR's value relatively steady. Currently, this basket includes:

• US Dollar
• Euro
• Chinese Renminbi (Yuan)
• Japanese Yen
• British Pound Sterling

Indian Economy, Vivek Singh (7th ed. 2023-24), International Organizations, p.398

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.68; Macroeconomics (NCERT class XII 2025 ed.), Open Economy Macroeconomics, p.89; Indian Economy, Nitin Singhania (2nd ed. 2021-22), International Economic Institutions, p.514; Indian Economy, Vivek Singh (7th ed. 2023-24), International Organizations, p.398

2. The International Monetary Fund (IMF) Governance (basic)

To understand the International Monetary Fund (IMF), think of it as a global "credit union" or a cooperative society of 190 nations. Unlike the UN General Assembly, where every country has one vote, the IMF operates on a weighted voting system. Your influence is directly proportional to your financial contribution, which is determined by your Quota.

When a country joins the IMF, it is assigned a quota based on its relative position in the world economy. This quota is the "heartbeat" of IMF governance because it determines three critical things: how much money you must contribute (subscription), how much voting power you have, and how much you can borrow Indian Economy, Nitin Singhania, International Economic Institutions, p.516. The quota itself is calculated using a specific formula that looks at four key economic indicators:

Factor	Weight	Description
GDP	50%	The primary measure of a country's economic size.
Openness	30%	How much the country engages in international trade.
Economic Variability	15%	Fluctuations in current and capital accounts (risk measure).
International Reserves	5%	The country's holdings of foreign exchange and gold.

Indian Economy, Vivek Singh, International Organizations, p.397

Interestingly, you don't pay your entire subscription in your local currency. To ensure the IMF has "hard" assets to lend, 25% of the quota must be paid in Special Drawing Rights (SDRs) or widely accepted currencies like the US Dollar or Euro, while the remaining 75% is paid in the member's own currency Indian Economy, Vivek Singh, International Organizations, p.397. The portion a country can withdraw at any time without conditions or interest is called the Reserve Tranche Position (RTP). This acts as a country's first line of defense during a liquidity crunch Indian Economy, Vivek Singh, International Organizations, p.398.

Beyond lending, the IMF acts as a global economic watchdog. It performs "surveillance" by monitoring the financial policies of member nations to prevent systemic collapses. As part of this role, it publishes two world-renowned reports: the World Economic Outlook (WEO) and the Global Financial Stability Report (GFSR) Indian Economy, Nitin Singhania, International Economic Institutions, p.514.

Sources: Indian Economy, Nitin Singhania, International Economic Institutions, p.514, 516; Indian Economy, Vivek Singh, International Organizations, p.397, 398

3. India's Foreign Exchange Reserve Composition (intermediate)

In our journey of understanding central banking, we now look at one of the most vital 'shields' of an economy: Foreign Exchange (Forex) Reserves. Think of these reserves as a national savings account in foreign currencies, managed by the Reserve Bank of India (RBI) as its legal custodian. The primary objective of holding these reserves isn't to make a profit, but to ensure liquidity (to pay for imports), safety (to protect against economic shocks), and stability of the national currency Indian Economy, Vivek Singh, Money and Banking- Part I, p.68.

India's Forex reserves are not just piles of US Dollars; they are a basket of four distinct components. It is crucial to distinguish between these official reserve assets and other financial instruments like ADRs or GDRs, which are simply certificates for trading shares and do not form part of the national reserves.

Component	Description
Foreign Currency Assets (FCA)	The largest component (usually over 90%). It includes holdings of multi-currency assets like the US Dollar, Euro, and Pound, invested in foreign government bonds or deposits with other central banks Indian Economy, Nitin Singhania, Balance of Payments, p.483.
Gold	Actual physical gold held by the RBI. It acts as a traditional store of value, especially when currencies are volatile.
Special Drawing Rights (SDRs)	An artificial currency or international reserve asset created by the IMF in 1969. While not a currency itself, it represents a potential claim on the usable currencies of IMF members.
Reserve Tranche Position (RTP)	A portion of the quota that India provides to the IMF in foreign currency or gold, which can be utilized by India for its own purposes without any service fee or conditions Indian Economy, Nitin Singhania, Balance of Payments, p.483.

The RBI manages these assets under the RBI Act, 1934. While traditionally we measured the "adequacy" of these reserves by how many months of imports they could cover (Import Cover), modern economics now focuses on the Guidotti-Greenspan rule. This rule suggests that reserves should be sufficient to cover all external debt obligations falling due within one year, ensuring the country can survive even if foreign lending stops completely Indian Economy, Nitin Singhania, India’s Foreign Exchange and Foreign Trade, p.497.

Sources: Indian Economy, Nitin Singhania, Balance of Payments, p.482-483; Indian Economy, Vivek Singh, Money and Banking- Part I, p.68; Indian Economy, Nitin Singhania, India’s Foreign Exchange and Foreign Trade, p.497

4. External Capital Raising: ADRs and GDRs (intermediate)

When an Indian company wants to raise capital from global investors, listing its shares directly on a foreign stock exchange (like the NYSE) can be incredibly expensive and legally complex. To bypass these hurdles, companies use Depository Receipts (DRs). These are negotiable financial instruments issued by a bank that represent a specific number of shares in a foreign company. Think of them as a 'proxy' for the actual shares, allowing foreign investors to trade in those companies without dealing with cross-border regulatory headaches or currency conversion issues at every trade. Indian Economy, Nitin Singhania (ed 2nd 2021-22), Balance of Payments, p.478

The mechanism involves two key players: a Domestic Custodian Bank in India, which holds the actual physical shares, and an Overseas Depository Bank, which issues the receipts to investors abroad. For instance, if an Indian company wants to raise funds in the United States, the Overseas Depository Bank issues American Depository Receipts (ADRs). These are denominated in US Dollars and traded on American exchanges. If the company wants to tap into the European or Asian markets, it issues Global Depository Receipts (GDRs), which function similarly but on a global scale. Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.100

Feature	American Depository Receipt (ADR)	Global Depository Receipt (GDR)
Market	Specific to the United States stock market.	International markets (e.g., London, Luxembourg).
Currency	Denominated only in US Dollars ($).	Usually USD, but can be in other currencies.
Compliance	Strict SEC (US regulator) requirements.	Relatively less stringent than US-specific ADRs.

It is important to distinguish these from other international instruments. While Special Drawing Rights (SDRs) are artificial currency units used by the IMF for reserves, ADRs and GDRs are capital market instruments—they represent ownership (equity) in a private or public company. Indian Economy, Nitin Singhania (ed 2nd 2021-22), International Economic Institutions, p.553. For the investor, these receipts are attractive because they can be transferred without heavy stamp duty and provide an easy way to diversify their portfolio into emerging markets like India.

Sources: Indian Economy, Nitin Singhania (ed 2nd 2021-22), Balance of Payments, p.478; Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.100; Indian Economy, Nitin Singhania (ed 2nd 2021-22), International Economic Institutions, p.553

5. Foreign Portfolio Investment (FPI) Mechanisms (intermediate)

To understand how a central bank manages the economy, we must look at how foreign capital enters our markets. Foreign Portfolio Investment (FPI) refers to the entry of foreign funds into the Indian stock or bond markets. Unlike Foreign Direct Investment (FDI), which involves a long-term interest and management control in a company, FPI is primarily about passive investment to earn financial returns. Because FPIs can be sold and pulled out quickly, they are often nicknamed 'Hot Money'—their sudden entry or exit can cause significant exchange rate volatility, which the RBI must then manage Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.99.

Under the Foreign Exchange Management Act (FEMA) 1999, the regulatory landscape is shared: while SEBI is responsible for granting licenses to FPIs (like foreign pension funds or mutual funds), the RBI monitors the actual capital inflows. Interestingly, an Indian company receiving FPI does not need prior RBI approval; it simply needs to report the inflow and share issuance in prescribed formats Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.98. To tap into foreign markets, companies also use instruments like American Depository Receipts (ADRs) and Global Depository Receipts (GDRs), which are negotiable certificates representing shares of an Indian company but traded on foreign exchanges like the NYSE or LSE Indian Economy, Nitin Singhania (2nd ed. 2021-22), Balance of Payments, p.478.

It is vital for students to distinguish between these financial instruments and Special Drawing Rights (SDRs). While ADRs and GDRs are capital-market instruments used by companies to raise money, SDRs are an artificial currency unit or reserve asset created by the IMF. SDRs are used for international liquidity and as a unit of account by the IMF, not for trading shares in the secondary market Indian Economy, Nitin Singhania (2nd ed. 2021-22), International Economic Institutions, p.514.

Feature	Foreign Direct Investment (FDI)	Foreign Portfolio Investment (FPI)
Nature	Long-term; involves management control.	Short-term/Transitional; passive investment.
Target	Specific projects or companies.	Secondary market (Stocks/Bonds).
Impact	Brings technology and skills.	Increases capital availability and liquidity.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.98-99; Indian Economy, Nitin Singhania (2nd ed. 2021-22), Balance of Payments, p.478; Indian Economy, Nitin Singhania (2nd ed. 2021-22), International Economic Institutions, p.514

6. Special Drawing Rights (SDR): The 'Paper Gold' (exam-level)

Let’s demystify one of the most unique concepts in international finance: the **Special Drawing Rights (SDR)**. Think of the SDR not as money you can carry in your wallet, but as the IMF’s own "internal accounting tool." Created in 1969, it was designed to act as an **international reserve asset** to supplement the existing official reserves (like gold and US dollars) of member countries Vivek Singh, International Organizations, p.398. It earned the nickname 'Paper Gold' because, initially, its value was tied to a specific weight of gold—the same weight that defined one US Dollar at the time Vivek Singh, International Organizations, p.398. However, today, it is purely a notional currency; there are no physical SDR coins or banknotes in circulation.

The SDR is defined by a **Currency Basket**, which currently consists of five heavyweights of the global economy: the US Dollar, Euro, Chinese Renminbi (Yuan), Japanese Yen, and British Pound Sterling Nitin Singhania, International Economic Institutions, p.514. This basket is reviewed every five years to ensure it reflects the true balance of global trade. It is crucial to understand that the SDR itself is neither a currency nor a claim on the IMF. Instead, it is a potential claim on the 'freely usable currencies' of IMF members. If a country like India needs immediate liquidity, it can exchange its SDR holdings for 'hard' currencies (like Dollars or Yen) through voluntary trading arrangements with other members Vivek Singh, International Organizations, p.398.

From a central banking perspective, SDRs are vital because they boost a country’s Foreign Exchange Reserves. The IMF allocates SDRs to members in proportion to their **IMF Quota**, which is based on their relative position in the world economy Vivek Singh, International Organizations, p.398. Unlike American Depository Receipts (ADRs) or Global Depository Receipts (GDRs), which are negotiable instruments representing shares in a company, the SDR is strictly an artificial currency unit used by international institutions Nitin Singhania, International Economic Institutions, p.553.

Feature	Special Drawing Rights (SDR)	Traditional Hard Currency (e.g., USD)
Physical Form	Notional/Book-keeping entry only	Banknotes, coins, and digital deposits
Who can hold it?	IMF members and authorized institutions	Governments, private entities, individuals
Market Trading	Not traded in forex markets	Traded 24/7 in global forex markets

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), International Organizations, p.398; Indian Economy, Nitin Singhania (ed 2nd 2021-22), International Economic Institutions, p.514; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Balance of Payments, p.553

7. Solving the Original PYQ (exam-level)

Now that you have mastered the basics of international finance and capital markets, this question brings those building blocks together. The term "artificial currency" is a specific designation used to describe a financial instrument that acts as a unit of account without having a physical presence like banknotes or coins. By connecting your knowledge of the International Monetary Fund (IMF) and its reserve mechanisms, you can identify that the Special Drawing Rights (SDR) fits this definition perfectly. As highlighted in Indian Economy, Nitin Singhania, the SDR is an international reserve asset created to supplement member countries' official reserves, functioning as a synthetic monetary unit often referred to as "paper gold."

To arrive at the correct answer, you must distinguish between a currency unit and an investment security. While SDRs are used by the IMF for lending and accounting, ADRs (American Depository Receipts) and GDRs (Global Depository Receipts) serve an entirely different purpose. They are capital market instruments—specifically, negotiable certificates that represent ownership of shares in a foreign company. UPSC often uses "alphabet soup" traps, pairing similar-sounding acronyms like ADR, GDR, and SDR together to test your precision. However, because ADRs and GDRs are essentially equity-based securities and not a medium of exchange or a reserve asset, they cannot be classified as currency. Therefore, the only instrument treated as an artificial currency is the SDR (Option C).