Use those reserves

Updated: May 23 2007, 05:30am hrs
With its $3 billion investment in Blackstone, China has once again done the unexpected. The move, part of its avowed plan to invest more of its $1.2 trillion of foreign exchange reserves in overseas assets that yield higher returns than the US treasury bills that currently comprise much of its holdings, is bound to have major ramifications for global capital markets while drawing more attention to the growing forex reserves of other emerging economies. None more so than that of India, which is sitting on reserves of $200 billion, invested largely in US T-bills with low 3-4% interest (and a negative carry of 2-2.5%). Between the aggression of the Chinese and the conservatism of the RBI is a chasm that needs to be bridged. The Chinese move is not without its critics, given that Blackstone attracts such harsh attention from some quarters even in its country of origin, the US. But then, this is precisely what makes Chinas move so daringand so focused on the simple extraction of returns. China is not interested in gaining any management sway, by the look of the deal. Luckily for it, there exists a happy precedent in Singapores Temasek, which has handled the city-states over $100 billion reserves with aplomb, proving that skillful management by a state investment agency can deliver good returns.

Judging the RBI on this is difficult, given that the investment mix of our currency reserves is not fully disclosed. But clearly, safety and liquidity have been the twin pillars of its strategy. So far, the suggestions mooted for the utilisation of these funds (at least the part deemed to be in excess of import-cover requirements) range from investing in infrastructure and prepayment of high-cost debt to strengthening the capital base of banks. But the time has come to be more adventurous. The RBI should consider the creation of a special investment fund that could courageously put the reserves to strategic use in assorted markets across the world. If China can set news tickers aflutter in dealing rooms everywhere, India, with its long-honed investment skills, can probably do no worse.