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RBI shifts stance, now supports SWF plan! |
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In a significant shift in its stance, the Reserve Bank of India — the custodian of India’s foreign exchange reserves — has supported the proposal to set up a sovereign wealth fund (SWF). But, unlike other countries, including China, which recently set up a $200 billion fund, its focus will be limited to the infrastructure sector. Recently, RBI Governor Y V Reddy had said that India is weighing the pros and cons of an SWF but suggested that if a sovereign entity is set up it could buy forex from the RBI and invest in assets that earn higher returns. He went on to elaborate a possible mechanism for using foreign exchange reserves, estimated at $312 billion on April 11.
Sovereign funds are owned by governments and are mostly formed out of large foreign exchange reserves for investments in debt and equity markets of other countries.
Reddy had said that one way could be to finance the sovereign wealth fund by purchasing forex from the RBI. The forex, then, may be invested by the sovereign entity in assets that offered better returns.
Finance ministry officials have also questioned the need to increase returns from these assets, especially when India had a current account deficit and a large fiscal deficit.
Besides, Reddy had pointed out that it was difficult to find out the amount of “excess” for ex reserves. The government has, however, used reserves to finance purchase of equipment and assets overseas by Indian infrastructure companies. The funds are routed through a special purpose vehicle of the India Infrastructure Finance Company Ltd.
One option is to let the government make a budgetary provision to purchase foreign exchange. The other option is to get public sector companies — particularly those with focus on strategic sectors like oil, gas and minerals — to pool in resources, transfer it to the proposed SWF and purchase foreign exchange.
According to a source close to the development, the second proposal will also help the government keep its fiscal deficit under check and the returns earned by the fund can add to the Centre’s resource pool.
While the modalities of the fund are yet to be thrashed out, the RBI does not want the foreign exchange reserves to be used. Instead, the rupee resources could be used to buy foreign currency.
The proposal for the SWF is part of a series of measures on infrastructure financing being discussed. Some of the steps are likely to find a mention in the Annual Monetary Policy Statement, due on April 29.
The proposed SWF will be in addition to the special purpose vehicle set up by India Infrastructure Finance Co Ltd, which has drawn $5 billion from the foreign exchange reserves to finance purchase of equipment and overseas acquisitions by Indian infrastructure companies.
Earlier last week, Finance Minister P Chidambaram had informed Parliament that the Prime Minister’s Council on Trade & Industry, comprising top business leaders, had recommended setting up a $5 billion SWF.
In another infrastructure sector-related development, the RBI is planning to relax the asset classification norms for core sector loans. Asset classification norms relate to the time period in which a bank classifies its loans and advances as standard or performing assets or as a non-performing asset.
According to existing norms, a loan is classified an NPA after 90 days of default. The review has been triggered by the fear that loans to several gas- based power projects in the South may turn sticky due fuel supply problems.
Banking sources said that even if the customer is servicing the interest requirement on such loans, commercial production is yet start in many such projects.
For classifying an infrastructure project in the performing category, it is not only essential for the customer to service the interest payments but also to ensure that commercial production has also kicked off. The RBI earlier has already extended the time period for NPA classification from six months to one year.
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