Reddy warms up to sovereign fund

Reserve Bank of India (RBI) Governor Y V Reddy has indicated that a Sovereign Wealth Fund (SWF) can help the country get better returns from its swelling forex reserves. India's forex reserves stood at $309.16 billion for the week ended March 28. This is the first time the RBI Governor has spoken in favour of a Sovereign Wealth Fund . The public policy is, however, yet to take a conscious view on the desirability of establishing a SWF, he said.

Speaking at an international capital markets and emerging markets roundtable in Washington, Reddy said, "It may be possible to argue that a part of the reserves, which may be considered to be in excess of the usual requirements, be managed with the primary objective of earning higher returns. 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."

Reddy further explained that if and when the country considers setting up of a SWF, one of the methodologies could be to fund SWF by purchasing foreign exchange from the central bank, to the extent required. "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," said Reddy.

The returns on the foreign exchange reserves, under the present framework, are constrained by the mandate to RBI, which understandably lays a greater emphasis on safety and liquidity. However, the central bank chief said while it is possible to make a case for an Indian SWF, there are also weighty arguments for caution in this regard.

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