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RBI debates setting up sovereign wealth fund |
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While speaking at the International Capital Markets and Emerging Markets Roundtable, in Washington DC, on Monday last, YV Reddy, governor, Reserve Bank of India (RBI) said that India is yet to take a conscious view on the desirability of setting up a sovereign wealth fund (SWF). In India, the use of India’s forex reserves for setting up a SWF has been the subject of much debate.
Sitting on the fence while giving the Indian perspective, Reddy, while outlining a possible methodology by which India could set up a SWF -- investment pools created by countries holding excess foreign exchange to invest in companies and assets across globe to earn higher returns -- pointed out reasons why it may not be possible to set up one right now.
Dr. Reddy said that while it was possible to make a case for setting up an Indian SWF, it would be difficult to assess the ‘reserve adequacy’ in a dynamic setting and on that basis divert a part of ‘excess’ reserves for a higher return from riskier assets. Besides, the Indian economy has a current account deficit as also a fiscal deficit. India also does not have any dominant ‘exportable’ natural resource e output, which might promise significant revenue gains at the current juncture. The Governor also argued that India has a negative international investment position with liabilities far exceeding assets.
The issue of SWFs acquiring considerable stakes in companies overseas has received global attention in recent times following a hawkish investment approach followed by countries like Singapore, UAE and China. A Bloomberg report quotes US Treasury officials estimating 40 SWFs worldwide managing $3 trillion dollars.
At present, the RBI holds the country's foreign exchange and under the RBI Act, and its mandate prevents the central bank from investing elsewhere for higher returns. In this backdrop Reddy suggested that the responsibility of setting up a SWF can be given to a different sovereign entity.
"If and when the country considers setting up of a SWF for the purpose, one of the methodologies could be to fund SWF by purchasing the foreign exchange from the central bank, to the extent required," he said.
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