The Reserve Bank of India (RBI) is expected to appoint Mercer Investment to prepare an investment framework for the country?s $251.7-billion forex reserves. This will be the first time RBI has given the mandate to any organisation to work as investment advisor for the fund.
Australia based Mercer has been selected after two rounds of bidding process-technical and financial, said sources knowledgeable about the process.
The timing of the appointment has however surprised analysts. Ila Patnaik monetary economist Ila Patnaik told FE, as most countries have invested their reserves in US dollars to ensure most liquidity. ?Unless money markets stabilise across the globe, it seems difficult to visualise any pattern that is skewed from the US treasury bonds. So I don?t see too much of role for any investment advisor?, she said.
The Indian reserves have lost about $50 billion in the course of 2008-09.
Mercer Investment will run the mandate for a period of three years. The others who were in the race for the prestigious assignment include McKinsey, Boston Consulting Group, KPMG and Ernst & Young. Mercer apparently got the assignment on the basis of the lowest management fees, it quoted.
In its tender, RBI had said any prospective bidder should have Rs 10,000 crore of assets under management. As per latest RBI figures, the return from earned by it forex reserves in 2007-08 was 5.1% against 4.7% in 2006-07, before accounting for mark to market deprecia- tion on securities. This is pretty close to the returns from the benchmark US government securities. However, RBI does not disclose the composition of its investment in different securities.
The management of the foreign exchange reserves of RBI has been debated extensively over the past few years. The Deepak Parekh committee on infrastructure has suggested investing $5 billion of the reserves in IIFCL papers. This has been done recently.
The appointment of the investment advisor is also interesting in the context of the plan by the finance ministry to set up a debt management office distinct from RBI to market government papers.
The move it still a long way off from the setting up of a sovereign wealth fund carved out of the forex reserves. Such a fund usually purchases forex from the central bank to the extent required.
These foreign currency funds could then be used by the sovereign entity for seeking higher returns by investing in assets, which a central bank?s remit does not permit.