IMF likely to extend change in SDR basket to Sep-2016

The IMF announced this morning that it has proposed to extend the current special drawing right (SDR) basket by nine months until September 30, 2016. However, IMF said that this will not prejudge the timing of conclusion or outcome of the SDR review. 

The formal review will still take place in late this year. IMF explains that the extension is in response to feedback from SDR users on the desirability of avoiding changes in the basket at the end of the calendar year and facilitating continued smooth functioning of SDR-related operations. 

IMF said that 'The Chinese renminbi (RMB) is the only currency not currently in the SDR basket that meets the export criterion. Therefore, a key focus of the current review will be whether the RMB also meets the freely usable criterion in order to be included in the SDR basket.

"This clearly suggests that IMF could still needs more evidence to prove that RMB is 'free usable', which largely refers to financial market liberalization and capital account openness", says Commerzbank. 

In fact, the market has started to question the progress of China's financial market liberalization, especially after Chinese government's recent intervention into the stock market. Without solid pace of capital account liberalisation, the possibility of RMB's inclusion into SDR will be lowered. 

"Against this backdrop, China will likely accelerate the relevant reforms to facilitate the SDR discussion. Regarding the market implications, the volatility of both CNY and CNH could increase significantly in the foreseeable future", added Commerzbank.