Even as Reserve Bank of India governor YV Reddy said that foreign exchange reserves should be directed towards a sovereign wealth fund for better returns, determining the size of the fund would be crucial, as a large chunk of forex reserve in India is directed towards servicing current account deficit. India?s foreign exchange reserve at present is over $310 billion.
While the curent account deficit is less than $ 15 billion, analysts said the composition of the reserves made such investment dicey. In India a large part of the forex reserves comprise foreign institutional investors (FII) and remittances while in other countries such as China and Russia it is mainly composed of foreign direct investments which are linked to earnings. That apart, these countries also have the advantage of having capital account surpluses. SWF have run into opposition from bodies like IMF which feels that these gives foreign countries unfair acces to often critical aspects of the receipent economy. Plus it extends government control over the flow of international capital.
Economists and senior bankers feel that even if the government decides to set up a sovereign wealth fund, the size would be relatively smaller compared to other countries such as Singapore, Russia, and Abu Dhabi. Abheek Barua, HDFC chief economist told FE the quantum of the sovereign fund, in case, the government decides for it, is likely to be smaller. ?If India decides to set up an SWF, it is bound to be a conservative one, considering our status on current account deficit,? Barua said. However, he said that a part of the forex reserves should be diverted towards a fund to earn better returns.
Singapore through its two arms Temasek and the Government of Singapore Investment Corp ( GIC ) has about $500 billion in its sovereign wealth fund. Abu Dhabi has a fund with a corpus of $875 billion while Russia has $100 billion, but is growing rapidly.
Saugata Bhattacharya, vice president, business and economic research, Axis Bank said that though it is makes sense to set up an SWF, it should be done with extreme dose of caution. ?In addition, the government getting involved in fund management may not be the best idea in India,? he pointed out.
As per estimates, the aggregate size of sovereign wealth funds globally is estimated at $2.20 billion. According to Morgan Stanley projections, it is set to touch $12 trillion by 2015. The share of these funds represents 2.5% of the total global assets at present while it may go up to 9% by 2015.