Though finance minister P Chidambaram is not yet ready for an Indian sovereign wealth fund (SWF), RBI governor YV Reddy has said for the first time that such a fund could help the country get better returns from its swelling foreign exchange reserves. However, public policy is yet to take a conscious view on the desirability of an SWF, he said.
Speaking at an international capital markets and emerging markets roundtable in Washington, Reddy said, ?It may be possible to argue that a part of the reserves, which may be considered to be in excess of the usual requirements, be managed with the primary objective of earning higher returns. Given the limitations placed on the central bank by its mandate, it can be held that it will be appropriate to bestow this responsibility on a different sovereign entity.?
Reddy further said that if and when such an SWF was set up, one of the methodologies could be to fund it by purchasing foreign exchange from the central bank to the extent required.
Returns on the foreign exchange reserves under the present framework are constrained by RBI?s mandate, which understandably lays greater emphasis on safety and liquidity. However, the central bank chief said that while it is possible to make a case for an Indian SWF, there are also arguments for caution.
First, it would be very difficult to reckon in the Indian context?as is the case with many other countries?the reserve adequacy in a dynamic setting and on that basis divert a part of the excess reserves to riskier assets for higher returns.
Second, while most countries that have set up SWFs have amassed large reserves either on account of persistent current account surpluses or due to revenue gains from commodity exports, in particular of oil and gas, India has neither. Third, India has experienced consistent but manageable current account deficits barring a few years of modest surplus. India also has a negative international investment position with liabilities far exceeding assets.