The Hindu Business Line : RBI not keen to manage sovereign wealth fund

The Indian economy has a current account deficit as also a fiscal deficit. India also does not have any dominant “exportable” natural resource output.

Dr Y. V. Reddy

Our Bureau

Mumbai, April 15 If sovereign wealth funds are set up in India, they could be managed by an independent sovereign entity, and not by the Reserve Bank of India, said the Governor, Dr Y.V. Reddy.

A Sovereign Wealth Fund (SWF) is a state-owned fund which comprises stocks, bonds, property or other financial instruments.

In India, the use of India’s forex reserves for setting up a SWF has been the subject of much debate.

“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. 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,” Dr Reddy said, speaking at the International Capital Markets and Emerging Markets Roundtable held at Washington DC.

He said that these foreign currency funds could then be used by the sovereign entity for seeking higher returns by investing in assets, which a central bank’s mandate may not permit.

As the SWF will be a public enterprise, it will be required to conform to the applicable governance, transparency and disclosure standards.

‘Dynamic setting’

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 output, which might promise significant revenue gains at the current juncture.

The Governor also argued that India has a negative international investment position (IIP) with liabilities far exceeding assets.

He said that India was monitoring recent developments in regard to enhancing transparency and disclosure in respect of hedge funds, private equity and SWFs. “In particular, India is watching with great interest the development of global codes, standards and practices in regard to SWFs, both in view of the presence of SWFs in the Indian financial markets and the ongoing debate on establishing an Indian SWF,” Dr Reddy concluded.

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