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Forward with forex

india Updated: Apr 20, 2008 22:11 IST

Hindustan Times
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Tapping into India’s foreign reserves, which stand at $ 312.3 billion, for setting up a sovereign wealth fund (SWF) to generate higher returns appears an idea whose time has come. As has been indicated by Y.V. Reddy, Reserve Bank of India governor, “it may be possible to argue that a part of the reserves, which may be considered in excess of requirements, be managed with the primary objective of earning higher returns.” Similar funds belonging to oil-rich sheikhdoms in West Asia and elsewhere — with assets of $ 3 trillion — are doing that with investments in ailing Wall Street firms like Merrill Lynch and Citigroup or in commodity futures. So, why can’t India follow suit?

Although a SWF sounds a capital idea to generate returns higher than the paltry interest of 2-3 per cent that reserves earn at present, Mr Reddy’s note of caution requires attention. For starters, it cannot be run by the RBI given the limitations on its mandate that emphasises safety and liquidity. Perforce, this responsibility will have to be bestowed on a different sovereign entity. Moreover, the question of whether our forex reserves are adequate has a bearing on how much of the so-called ‘excess’ can be diverted for a higher return from riskier assets. Lastly, most of the SWFs are funded through windfall gains like zooming oil prices. India is not so fortunate in this respect.

That said, utilising a part of the reserves for India’s infrastructural development has already made some headway. As our reserves are more than adequate to meet its liquid liabilities and short- term debt, at least $ 5 billion a year over the next two to three years can easily be diverted from the kitty to help build infrastructure. A special purpose vehicle, controlled by the government, called the India Infrastructure Finance Company Ltd (IIFCL) has been set up to fund infrastructural projects. The finance minister recently inaugurated IIFCL’s overseas subsidiary based in London. The need for exercising such options is obvious as India’s investment requirements in infrastructure are estimated at $ 320 billion over the next five years. Utilising a portion of our reserves to plug some of these gaps is not a bad idea at all.