RBI agrees to dip into forex for energy fund

“An in-principle approval has been taken to set up a sovereign wealth fund. Its size and contours will be finalised over the next few months,” an official close to the development said.

A meeting of a group of ministers chaired by finance minister Pranab Mukherjee was to be held on Tuesday but was later deferred.

A sovereign wealth fund (SWF) is a state-owned vehicle which is used to invest in assets abroad and have been set up by a number of countries including China,Singapore,Saudi Arabia,Norway,Kuwait and Russia.

China Investment Corporation,the country’s over $300 billion SWF,has invested in a number of energy assets including Canada,the United States,Africa and Caspian region.

According to the proposal,India’s sovereign wealth fund will shop for energy assets including crude oil,gas and coal to meet its domestic requirements. It is likely to be structured as a Reserve Bank of India subsidiary.

While the Reserve Bank of India has agreed to dip into the country’s foreign exchange reserves and provide $5 billion,an equal amount will be sought from state-owned energy firms.

“The RBI has finally dropped its long held reservations about setting up an SWF as the country’s forex reserves at a comfortable stage and can easily finance the current account deficit (CAD). Also it was felt that ensuring energy security has to be as much of a priority as having decent forex reserves as oil imports form a huge part of the CAD,” the official said.

India’s foreign exchange reserves amounted to $316.60 billion for the week ended August 12,according to data with the central bank.

While the government has been mulling over setting up a SWF for a number of years now,RBI’s reservations on using foreign exchange was one of the biggest stumbling blocks.

But the proposal gained currency in the last few months as the country’s oil import bill bloated to record levels.

It was taken up for discussion in July when a group of ministers was set up on the issue and Planning Commission deputy chairman Montek Singh Ahluwalia was also asked to examine its feasibility.

Till now,India has been buying energy assets abroad — either through government owned oil and gas undertakings or through the private sector,but these are small change compared to China’s shopping. India’s efforts,at best,are small and piecemeal compared with the scale and ambition of China and other countries.

The government estimates that India lost bids worth around $12.5 billion to China in the year 2009 alone.

War chest

* Fund likely to have a corpus of $10 billion,though government sources say that size might be reviewed

* India’s sovereign wealth fund likely to be structured as a Reserve Bank of India subsidiary

* RBI’s reservations on using foreign exchange was one of the biggest stumbling blocks for setting up a SWF

* Proposal gained momentum in last few months as the country’s oil import bill bloated to record levels