New Delhi: The government may float an offshore investment company that will invest part of the country’s foreign exchange reserves in relatively risky overseas instruments and plough the potentially higher returns into domestic infrastructure projects.
“Several options were being considered earlier. The thinking now is that the offshore company will be set up by the monetary regulator—the Reserve Bank of India,” said a finance ministry official who did not want to be quoted. “The company can be set up either in Mumbai and use the foreign exchange reserves to invest overseas or be located in one of the financial centres like London or New York. The investment will be in instruments which earn a return higher than any instruments available within the country.”
The official did not disclose the extent of forex reserves or the patterns of investment that the offshore company, modelled on the lines of the Government of Singapore Investment Corporation, would have.
If the proposal is cleared, India will join other Asian countries, such as China and Korea, which have tried to grapple with the problem of effectively utilizing burgeoning forex reserves.
China has invested a part of its forex reserves to prop up ailing banks. Now it plans to start an investment company, dubbed the State Foreign Exchange Investment Company, which is expected to be in charge of $210 billion (Rs9.24 lakh crore), about a fifth of the country’s foreign exchange reserves, according to media reports based on economists and analysts who follow China. The fund is expected to invest in a wide array of investments targets in China and abroad.
The proposal to moot an Indian investment company comes just weeks after finance minister P. Chidambaram announced in December that the finance secretary would prepare a paper on implications of using forex reserves to create infrastructure.
The official said that a discussion paper has been prepared on the utilization of foreign exchange reserves and that the matter was being discussed between key government agencies, including RBI, the Securities and Exchange Board of India and even the Planning Commission.
Some of the earlier proposals, such as using the forex to import capital goods, had not found favour. “It is easier to lower the import duty on capital goods used in infrastructure,” the official said.
The model for China and Korea is Singapore’s GIC. GIC was floated in 1981 as a private company wholly by the government and was meant to manage forex reserves. GIC, which invests about half of its assets in equity, manages over $100 billion today. Its investments include a 2.29% stake in India’s largest private bank, ICICI Bank.
Currently, RBI manages India’s foreign exchange assets, which were at $158.34 billion at the end of September 2006. Investments of forex assets are guided by the Reserve Bank of India Act, and are deployed in the safest of avenues such as deposits with other central banks. As a consequence, the returns are low.
In 2005-06, the return on foreign exchange assets was 3.9% and in the year earlier it was 3.1%. India’s economic growth over the last two years has been about 9%.
In 2004, the government floated the idea of using forex reserves to finance infrastructure, but the idea did not crystallize into a concrete plan.
RBI governor Y. V. Reddy, in the past, has identified some of critical issues while diverting forex reserves to fund infrastructure development. Unlike China and Korea, the bulk of India’s growth in forex reserves has come from capital inflows such as foreign institutional investments.
Consequently, the growth in forex reserves rest on shakier ground. Growth in forex reserves in China and Korea is largely on account of strong export performance, which translates into trade surplus.