Special Drawing Rights (SDRs) relate to—

1. The Bretton Woods Institutions: IMF vs. World Bank (basic)

In 1944, as World War II was drawing to a close, delegates from 44 nations gathered at a hotel in Bretton Woods, New Hampshire, USA. Their mission was to prevent another global economic collapse like the Great Depression and to rebuild the war-torn world. This gathering, officially known as the United Nations Monetary and Financial Conference, gave birth to two pillars of the global economy: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which we now call the World Bank Indian Economy, Nitin Singhania, Chapter 18, p. 552. Because they were born from the same event, they are famously known as the Bretton Woods Twins.

While they are twins, their roles are distinct. Think of the IMF as a 'Firefighter' and the World Bank as an 'Architect.' The IMF acts as a global monitor, ensuring that exchange rates are stable and helping countries that run out of foreign currency to pay for imports — a situation known as a Balance of Payments (BoP) crisis NCERT History Class X, Chapter: The Making of a Global World, p. 75. On the other hand, the World Bank was originally created for reconstruction of war-damaged nations and has since shifted its focus to the long-term development of poorer countries by funding infrastructure, health, and education projects Indian Economy, Vivek Singh, Chapter 13, p. 396.

The differences in how they operate are summarized below:

One critical aspect of their governance is that they are not perfectly democratic. Unlike the UN General Assembly where every country has one vote, voting power in the Bretton Woods institutions is tied to the financial contribution (quota/share) of the member country. This gives Western industrial powers, particularly the United States, a dominant say and an effective veto over major decisions NCERT History Class X, Chapter: The Making of a Global World, p. 75.

Sources: Indian Economy, Nitin Singhania, International Economic Institutions, p.552; India and the Contemporary World – II. History-Class X . NCERT, The Making of a Global World, p.75; Indian Economy, Nitin Singhania, International Economic Institutions, p.512; Indian Economy, Vivek Singh, International Organizations, p.396

2. IMF Governance and Quota System (intermediate)

At the heart of the International Monetary Fund (IMF) lies its Governance Structure and the Quota System. Think of the IMF not as a traditional bank, but as a credit union where each member contributes a specific amount of money, which in turn determines their influence and benefits. The top-most decision-making body is the Board of Governors, where every member country is represented by a Governor (usually the Finance Minister) and an Alternate Governor (usually the Central Bank Governor). For India, our Finance Minister serves as the Governor and the RBI Governor as the Alternate Governor Nitin Singhania, Chapter 18, p. 513. While the Board of Governors meets annually to make big-picture decisions like admitting new members or changing quotas, the day-to-day operations are managed by the Executive Board, consisting of 24 Directors and headed by the Managing Director Nitin Singhania, Chapter 18, p. 514.

The Quota System is the engine that powers this institution. When a country joins the IMF, it is assigned a quota based on its relative position in the world economy. This quota is calculated using a weighted formula that considers four key economic factors:

Source: Nitin Singhania, Chapter 18, p. 516

A member's quota is fundamental because it determines four critical aspects: their Subscription (the maximum financial resources they must provide), Voting Power (unlike the UN's 'one country, one vote', IMF voting is weighted by quota), Borrowing Capacity (how much help they can get during a crisis), and their share of SDR allocations Vivek Singh, Chapter 13, p. 398. Currently, the U.S. holds the largest quota (approx. 17.44%), while India holds 2.76% Nitin Singhania, Chapter 18, p. 516.

Finally, we must understand the Reserve Tranche Position (RTP). This is the portion of a member's quota that they can access at any time without any conditions or obligation to repay. It essentially acts as a country's own money parked with the IMF, which is why it is counted as part of a nation's official Foreign Exchange Reserves Vivek Singh, Chapter 13, p. 398.

Sources: Indian Economy, Nitin Singhania, Chapter 18: International Economic Institutions, p.513-516; Indian Economy, Vivek Singh, Chapter 13: International Organizations, p.398

3. Understanding Balance of Payments (BoP) (intermediate)

Think of the Balance of Payments (BoP) as a comprehensive financial ledger for a country. It is a systematic record of all economic transactions between the residents of a country and the rest of the world over a specific period, usually a year Indian Economy, Nitin Singhania, Chapter 16, p.487. In India, this is compiled on an accrual basis using a vertical double-entry system, meaning every credit has a corresponding debit, ensuring the overall account technically stays in balance.

The BoP is divided into two primary accounts, distinguished by how they affect a nation's wealth and debt structure:

• Current Account: This captures the "day-to-day" flow of money for goods and services. Crucially, these transactions do not change the total assets or liabilities of the country Indian Economy, Vivek Singh, Chapter 13, p.107. It includes the Trade Balance (export/import of visible goods) and Invisibles (services like IT, remittances from workers abroad, and income from investments like dividends) Macroeconomics NCERT Class XII, Chapter 6, p.87.
• Capital Account: This account records transactions that do alter the assets and liabilities of a country. When an Indian company receives Foreign Direct Investment (FDI) or the government takes a loan from the World Bank, it is recorded here because it creates a future claim or obligation Indian Economy, Nitin Singhania, Chapter 16, p.469.

To manage fluctuations in the BoP, countries hold Foreign Exchange Reserves. A vital component of these reserves is Special Drawing Rights (SDRs). Created by the IMF in 1969, the SDR is not a currency but an international reserve asset. Its value is based on a basket of five major currencies: the US Dollar, Euro, Chinese Renminbi, Japanese Yen, and British Pound Indian Economy, Nitin Singhania, Chapter 18, p.514. Interestingly, while SDRs are part of India's reserves, they are held in the custody of the Government of India rather than the Reserve Bank of India (RBI) Indian Economy, Nitin Singhania, Chapter 16, p.483.

Sources: Indian Economy, Nitin Singhania, Chapter 16: Balance of Payments, p.469, 483, 487; Indian Economy, Nitin Singhania, Chapter 18: International Economic Institutions, p.514; Indian Economy, Vivek Singh, Chapter 13: International Organizations, p.107, 398; Macroeconomics (NCERT class XII 2025 ed.), Open Economy Macroeconomics, p.87

4. Foreign Exchange Reserves (Forex) of India (intermediate)

Think of Foreign Exchange Reserves (Forex) as India’s national savings account in international currencies. Just as a household keeps some cash aside for emergencies, a country maintains these reserves to ensure it can pay for essential imports (like crude oil or electronics) and maintain the stability of its currency, the Rupee. In India, the Reserve Bank of India (RBI) acts as the custodian of these reserves under the RBI Act, 1934, managing them with three core principles: safety, liquidity, and returns Vivek Singh, Money and Banking- Part I, p.68.

India’s Forex reserves are not just piles of US Dollars; they are composed of four distinct pillars. The largest chunk (over 90%) consists of Foreign Currency Assets (FCAs), which include investments in foreign government bonds and deposits in other central banks. The other components are Gold, Special Drawing Rights (SDRs), and the Reserve Tranche Position (RTP) in the IMF Nitin Singhania, Balance of Payments, p.483. A unique detail to remember is that while the RBI manages most of these, the SDRs are technically held in the custody of the Government of India.

To understand the strength of these reserves, economists use a metric called Import Cover. This tells us how many months of imports the country can afford if all foreign earnings were to stop tomorrow. Historically, a 3-month cover was considered the "safe" threshold, but India has significantly bolstered its position, often maintaining enough reserves to cover 10 months or more of imports Vivek Singh, Money and Banking- Part I, p.108.

Sources: Indian Economy, Nitin Singhania, Balance of Payments, p.483; Indian Economy, Vivek Singh, Money and Banking- Part I, p.68, 108; Indian Economy, Nitin Singhania, International Economic Institutions, p.514

5. International Reserve Assets and Liquidity (exam-level)

In the realm of global finance, liquidity refers to the ease with which an asset can be converted into a universally accepted medium of exchange without losing its value Indian Economy, Nitin Singhania, Financial Market, p.236. Just as individuals hold cash for emergencies, nations maintain International Reserve Assets to ensure they can pay for imports or settle international debts even during a crisis. While gold and the US Dollar have historically been the primary reserves, the growth of global trade sometimes outpaces the supply of these assets. To address this global liquidity gap, the International Monetary Fund (IMF) created the Special Drawing Right (SDR) in 1969.

It is crucial to understand that the SDR is not a currency. Instead, it is a potential claim on the freely usable currencies of IMF members. It serves as a unit of account for the IMF and other international organizations. The value of an SDR is not fixed; it is determined by a weighted basket of five major global currencies that meet specific export and "freely usable" criteria. These currencies are reviewed every five years to ensure they reflect the current global economic balance Indian Economy, Vivek Singh, International Organizations, p.398.

For India, SDRs are a vital component of our Foreign Exchange Reserves. However, a unique administrative distinction exists: while the Reserve Bank of India (RBI) manages the overall foreign exchange, the SDRs are technically held by the Government of India Indian Economy, Nitin Singhania, Balance of Payments, p.483. When a country faces a Balance of Payments (BoP) crisis, it can exchange its SDRs for usable currencies (like Dollars or Euros) through voluntary trading or IMF-facilitated designations, thereby providing the necessary liquidity to stabilize its economy.

Sources: Indian Economy, Nitin Singhania, Financial Market, p.236; Indian Economy, Vivek Singh, International Organizations, p.398; Indian Economy, Nitin Singhania, Balance of Payments, p.483

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

In the world of international finance, Special Drawing Rights (SDRs) represent one of the most unique concepts. Created by the International Monetary Fund (IMF) in 1969, the SDR is often referred to as 'Paper Gold' because it was initially designed to supplement member countries' official reserves (gold and US dollars) during the Bretton Woods fixed exchange rate era Indian Economy, Vivek Singh (7th ed. 2023-24), International Organizations, p.398. However, it is crucial to understand that the SDR is not a currency. It does not exist in physical notes or coins, and you cannot use it to buy a cup of coffee. Instead, it is a potential claim on the freely usable currencies of IMF members and serves as the IMF's official unit of account Indian Economy, Nitin Singhania (ed 2nd 2021-22), International Economic Institutions, p.514.

The value of an SDR is not static; it is determined by a weighted basket of five major global currencies. These currencies are selected based on their importance in international trade and their status as 'freely usable' Indian Economy, Nitin Singhania (ed 2nd 2021-22), International Economic Institutions, p.515. The basket is reviewed every five years to ensure it reflects the actual balance of power in the global financial system. The current basket includes:

• US Dollar (highest weightage)
• Euro
• Chinese Renminbi (Yuan) (included in 2016)
• Japanese Yen
• British Pound Sterling

How does it work in practice? The IMF allocates SDRs to its member countries in proportion to their IMF Quotas. Once allocated, these SDRs become part of a country’s Foreign Exchange Reserves. For India, while the Reserve Bank of India (RBI) manages the forex, the SDRs are technically held in the custody of the Government of India Indian Economy, Nitin Singhania (ed 2nd 2021-22), Balance of Payments, p.483. If a country faces a Balance of Payments (BoP) crisis, it can exchange its SDRs for hard currencies (like Dollars or Euros) through voluntary trading arrangements with other IMF members to stabilize its economy Indian Economy, Vivek Singh (7th ed. 2023-24), International Organizations, p.398.

Sources: Indian Economy, Nitin Singhania (ed 2nd 2021-22), International Economic Institutions, p.514-515; Indian Economy, Vivek Singh (7th ed. 2023-24), International Organizations, p.398; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Balance of Payments, p.483

7. Solving the Original PYQ (exam-level)

You’ve just explored the architecture of global finance, and this question brings those building blocks together. Having studied Balance of Payments (BoP) and International Economic Institutions, you know that countries need a stable reserve asset to manage liquidity crises. The Special Drawing Rights (SDRs) represent exactly that—a supplementary international reserve asset created in 1969. As noted in Indian Economy, Nitin Singhania, the SDR was born out of the need to support the global reserve system, serving as a unit of account determined by a basket of five major currencies rather than being a physical currency itself.

To arrive at the correct answer, (D) the International Monetary Fund, you must think about the primary mandate of each organization. The IMF acts as the global "lender of last resort" responsible for monetary cooperation and BoP stability, which aligns perfectly with the creation and allocation of SDRs based on member quotas. Why are the other options traps? While the World Bank (Option A) focuses on long-term developmental projects, and the WTO (Option C) governs trade rules, neither manages international reserve assets. A common student error is selecting (B) the Reserve Bank of India; however, while the RBI manages India's foreign exchange, it does not "relate" to the origin or governance of SDRs. As highlighted in Indian Economy, Vivek Singh, SDRs are part of our reserves but are held by the government, not the central bank. Distinguishing between domestic management and international creation is a classic UPSC requirement.