RBI debates the pros and cons of a sovereign fund

RBI debates the pros and cons of a sovereign fund
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First Published: Wed, Apr 16 2008. 12 18 AM IST

Reddy says it is possible to make a case for a sovereign wealth fund, but there are also arguments for caution on any such plans
Reddy says it is possible to make a case for a sovereign wealth fund, but there are also arguments for caution on any such plans
Updated: Wed, Apr 16 2008. 12 18 AM IST
Mumbai: Reserve Bank of India (RBI) governor Yaga Venugopal Reddy has said it is possible to make a case for a sovereign wealth fund to manage the country’s foreign currency reserves, which are the world’s fourth largest.
Accelerated gains in the co-untry’s reserves are raising expectations for higher returns, Reddy said in Washington on Monday. The Mumbai-based RBI released the copy of his speech by email on Tuesday.
Reddy says it is possible to make a case for a sovereign wealth fund, but there are also arguments for caution on any such plans
The returns from the reserves are constrained by the bank’s mandate, which emphasizes “safety and liquidity”, he said.
“It may be possible to argue that a part of the reserves, which may be considered in excess of usual requirements, be managed with the primary objective of earning higher returns,” Reddy said. “Given the limitations placed on the central bank by its mandate, it will be appropriate to bestow this responsibility on a different sovereign entity.”
The so-called sovereign wealth funds, or state-owned capital pools, in Russia, China, Norway and elsewhere, have grown in number to about 40 worldwide, managing as much as $3 trillion (Rs120 trillion), according to estimates cited by US treasury officials.
India held $299.15 billion in foreign currency reserves as of 11 April, compared with China’s record $1.68 trillion, Japan’s $987.7 billion and Russia’s $508 billion, according to data compiled by Bloomberg.
India’s total reserves rose 55.5% in 2007, beating a 29% gain in the previous year, as economic growth attracted increased investment from overseas.
Asia’s third largest economy has expanded at an average 8.7% a year since 2003, the fastest pace after China, among major economies.
Reddy said there are also “arguments for caution” on any plan to set up a sovereign wealth fund.
“It would be very difficult to reckon reserve adequacy in a dynamic setting and on that basis divert a part of excess reserves for a higher return from riskier assets,” he said.
India’s fiscal and current account deficits also separate it from countries that already have wealth funds, as most of them have current account surpluses, Reddy said. The nation’s current account deficit widened to $5.4 billion in the three months through December from $4.7 billion in the previous quarter, RBI data shows.
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First Published: Wed, Apr 16 2008. 12 18 AM IST