Indian Economy · Guided learning
A country runs out of foreign currency overnight. Who does it call?
The International Monetary Fund helps countries facing balance of payments trouble, functioning as one of the twin institutions born at Bretton Woods. This lesson walks through what the IMF actually does, and how its own tools and governance work.
Must Know · Learn what the IMF does
1. What is the IMF, and why was it created?
The International Monetary Fund (IMF) was established in 1944, at the Bretton Woods Conference. The World Bank was set up at the same conference.
The IMF and World Bank are jointly known as the Bretton Woods twins. They opened for business in 1945.
The IMF mainly provides finance for short-term balance of payments problems. This is different from the World Bank’s longer-term development focus.
2. How is the IMF different from the World Bank?
The IMF’s short-term focus, versus the World Bank’s development role, explains why countries turn to each institution for very different needs.
Example: a country facing an urgent shortage of foreign currency to pay for imports turns to the IMF. A country building a decade-long highway or power-grid programme turns to the World Bank.
QUICK CHECK 1 OF 5 · TRUE OR FALSE
The IMF’s main focus is long-term development projects, the same as the World Bank.
The IMF’s core job is short-term balance of payments finance. Long-term development projects are the World Bank’s role instead.
These loans aren’t abstract. A few real bailouts show what “short-term balance of payments finance” actually looks like on the ground:
- India, 1991: forex reserves fell below $1 billion, barely enough for three weeks of imports. India secured a $2.2 billion IMF loan, pledging 67 tonnes of gold as collateral, airlifted to the Bank of England and the Union Bank of Switzerland. The crisis directly triggered the 1991 LPG (Liberalisation, Privatisation, Globalisation) reforms.
- Greece, 2010s: facing a sovereign debt crisis, Greece received three bailout packages from the “troika” of the IMF, European Commission, and European Central Bank, in 2010, 2012, and 2015, totalling roughly €289 billion. It was the largest sovereign bailout in history at the time.
- Argentina, 2018: the IMF approved a $50 billion loan (later expanded to $57 billion), its largest programme ever, to stem capital flight and support the peso. The programme still didn’t stop high inflation or a later 2020 sovereign default, Argentina’s ninth.
- Sri Lanka, 2022-23: after its worst economic crisis since independence, Sri Lanka secured a nearly $3 billion IMF Extended Fund Facility in March 2023, aimed at restoring macroeconomic stability and debt sustainability.
Sources: 1991 Indian economic crisis; European Stability Mechanism, Greece; Argentina and the IMF; IMF, Sri Lanka EFF approval.
QUICK CHECK · TRUE OR FALSE
India’s 1991 IMF loan involved pledging gold reserves as collateral, and directly led to the LPG economic reforms.
That’s correct. India pledged 67 tonnes of gold for a $2.2 billion IMF loan, and the crisis directly triggered the 1991 Liberalisation, Privatisation, Globalisation reforms.
3. Who can join the IMF, and how does voting work?
To join the IMF, a country’s basic condition is that it must also be a member of the United Nations.
The IMF uses quota-based voting. Larger economies hold larger quotas, so they get proportionally more influence over decisions.
QUICK CHECK 2 OF 5 · TRUE OR FALSE
A country must be a UN member before it can join the IMF.
That is the IMF’s basic membership condition — UN membership comes first.
Good to Know · See how the IMF actually works
4. What are Special Drawing Rights?
Special Drawing Rights (SDRs) are allocated to IMF member nations in proportion to their financial quota.
SDRs function as a kind of international reserve asset. They supplement countries’ own foreign exchange and gold reserves, rather than replacing them.
Worked example. Think of SDRs as a credit line built into the IMF system itself, valued against a basket of major currencies rather than any single one. A country holding SDRs can exchange them with other member countries for usable currency, like dollars or euros, when it needs cash. It’s not a currency anyone spends directly, but a reserve asset that unlocks other currencies.
Only IMF member countries and a short list of “prescribed holders” can hold SDRs directly. Prescribed holders include the World Bank and the Bank for International Settlements, among others.
Private individuals, banks, and companies cannot hold SDRs. This keeps the SDR system strictly a tool for governments and official international institutions.
The IMF pays and charges interest on SDR holdings, called the SDR interest rate. It is recalculated weekly, based on a weighted average of short-term interest rates in the countries whose currencies make up the SDR basket.
4a. What was the 2021 SDR allocation, and how much did India get?
On 23 August 2021, the IMF made a General Allocation of SDR 456.5 billion (about $650 billion) to member countries. It was the largest SDR allocation in the IMF’s history.
The allocation aimed to boost global liquidity as countries faced the economic strain of the COVID-19 pandemic. Every member received a share proportional to its existing IMF quota, exactly like any other SDR allocation.
India received about SDR 12.57 billion, worth roughly $17.86 billion at the time, added directly to its foreign exchange reserves.
Exam trap: SDRs are allocated strictly by quota share, not by need. Richer countries with larger quotas received the largest allocations in absolute terms. Smaller, poorer economies often needed the boost more, but still received less.
QUICK CHECK · TRUE OR FALSE
The 2021 SDR allocation, the largest in IMF history, was made in response to the COVID-19 pandemic.
Correct. The $650 billion (SDR 456.5 billion) allocation on 23 August 2021 aimed to boost global liquidity during the pandemic; India received about SDR 12.57 billion.
5. What is the Gold (Reserve) Tranche?
The “Gold Tranche,” also called the Reserve Tranche, is the portion of a member’s quota it can draw without conditions.
QUICK CHECK 3 OF 5 · TRUE OR FALSE
A country must meet IMF conditions before it can draw on its Gold Tranche.
It does not. The Gold Tranche is specifically the portion of a member’s quota it can draw WITHOUT conditions.
6. How is the SDR basket’s value set?
The value of the SDR basket is set by a specific group of major world currencies. Each currency is weighted by its global significance.
The IMF has kept adding new member countries over the decades since its founding.
7. When did the renminbi join the SDR basket?
In 2016, the IMF added China’s renminbi to the SDR basket.
The IMF’s Executive Board agreed to the change in November 2015, after a review of the SDR basket. The new basket took effect on 1 October 2016.
The renminbi joined the US dollar, euro, Japanese yen, and British pound sterling in the basket — the first time a new currency was added since the euro’s creation.
QUICK CHECK 4 OF 5 · TRUE OR FALSE
The Chinese renminbi joined the SDR basket in 2016, the first new currency added since the euro’s creation.
That is exactly what happened — the renminbi’s addition, effective 1 October 2016, was the first new SDR-basket currency since the euro.
8. What is “international liquidity,” and why were SDRs created?
International liquidity is the stock of internationally-acceptable reserve assets a country can use to settle its balance of payments deficits.
Before the modern floating-rate system, gold held by central banks was the main limit on this reserve stock. Later, the US dollar and other freely convertible (“hard”) currencies became the main reserve assets countries held and traded in.
By the late 1960s, the supply of gold and hard currencies wasn’t growing fast enough to meet rising global demand for reserves. This was the actual “problem of international liquidity.”
The IMF created Special Drawing Rights in 1969 to ease this shortfall. SDRs act as a supplementary reserve asset, on top of a country’s own gold and hard-currency holdings.
Great to Know · See how the IMF is governed
9. What is the IMFC?
The International Monetary and Financial Committee (IMFC) is the IMF Board of Governors’ main advisory body.
IMFC discusses matters of concern affecting the global economy. It advises the IMF on the direction of its work.
Exam trap: the IMFC has no formal decision-making power of its own. It issues a communiqué after each meeting, which guides the IMF’s work programme until the next one.
The IMFC meets twice a year, during the IMF’s Spring and Annual Meetings. The World Bank participates as an observer at IMFC meetings, alongside several other international institutions.
QUICK CHECK 5 OF 5 · TRUE OR FALSE
The IMFC has formal, binding decision-making power over IMF policy.
It does not. The IMFC is an advisory body — it issues a communiqué after each meeting, but has no formal power to bind IMF decisions.
10. Why does quota-based voting matter?
The IMF’s quota-based voting system means wealthier, larger economies hold proportionally more influence over the institution’s decisions.
Why this matters. A country’s quota decides three things at once: how much it must contribute to IMF funding, how much it can borrow in a crisis, and how many votes it gets. The United States holds the largest quota and, alone, enough voting share to block major decisions requiring an 85% supermajority — a structural point critics of IMF governance often raise.
Exam Practice · See how it is actually tested
11. Exam Practice: the Rapid Financing Instrument and Rapid Credit Facility
Question UPSC (CSP) 2022 asked which institution’s lending provisions the “Rapid Financing Instrument” and “Rapid Credit Facility” relate to.
The correct answer is the IMF. The RFI gives urgent balance-of-payments assistance to any member; the RCF is a similar concessional facility for low-income countries.
Source: UPSC CSP 2022.
12. Exam Practice: the Gold Tranche
Question UPSC (CSP) 2020 asked what the “Gold Tranche” (Reserve Tranche) actually refers to.
Source: UPSC CSP 2020.
13. Exam Practice: the IMFC’s role, and who prepares the Global Financial Stability Report
Question UPSC (CSP) 2016 tested statements about the IMFC’s role and structure.
Source: UPSC CSP 2016.
Question The same year, UPSC (CSP) 2016 also asked which institution prepares the “Global Financial Stability Report.”
Source: UPSC CSP 2016.
14. Exam Practice: the problem of international liquidity
Question UPSC (CSP) 2015 asked what the “problem of international liquidity” is related to the non-availability of.
Source: UPSC CSP 2015.
Your turn · Check understanding
15. Can you explain it without looking back?
Pause before opening each answer. Aim to explain the idea in your own words.
Think it through. What is the one-sentence difference between the IMF and the World Bank?
Show the explanation
The IMF handles short-term balance of payments finance; the World Bank handles long-term development finance.
Think it through. Why were SDRs created in 1969?
Show the explanation
Because the supply of gold and hard currencies wasn’t growing fast enough to meet rising global demand for reserves — SDRs were created as a supplementary reserve asset to ease that shortfall.
Think it through. Does the IMFC have the power to force an IMF policy change?
Show the explanation
No. It is purely advisory — it issues a communiqué guiding the IMF’s work, but has no formal binding decision-making power.
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