The Special Drawing Right (SDR) is an interest-bearing international reserve asset and a unit of account, created by the International Monetary Fund (IMF), not a currency itself, but a potential claim on the freely usable currencies of IMF members. It was established in 1969 to supplement member countries' official reserves, solving the problem of a global shortfall in preferred reserve assets like gold and the U.S. dollar under the then-existing Bretton Woods system.
The mechanism of the SDR is based on a basket of five major currencies: the U.S. dollar, the Euro, the Chinese Renminbi, the Japanese Yen, and the British Pound Sterling. The IMF allocates SDRs to its member countries in proportion to their IMF quotas, and a country's holdings of SDRs are counted as part of its foreign exchange reserves, which is the case for India. Member countries can exchange their SDRs for hard currencies with other IMF members, often through voluntary trading agreements.
The SDR connects directly to the IMF's quota system and is used to support the Poverty Reduction and Growth Trust (PRGT) and the Resilience and Sustainability Trust (RST), which provide financing to vulnerable countries. A significant recent change occurred when the Chinese Renminbi was added to the valuation basket in 2016. Furthermore, the largest-ever allocation of about SDR 456 billion (equivalent to approximately US$650 billion) was approved on August 2, 2021, and became effective on August 23, 2021, to provide global liquidity and help countries cope with the impact of the COVID-19 pandemic.