New Delhi: The Budget has opened the door for using a part of India’s $180-billion foreign exchange reserves to finance infrastructure and give a fillip to such projects in the country, even though no firm amount has been set aside for this.
The government is looking at floating two wholly owned foreign subsidiaries of India Infrastructure Finance Company Ltd (IIFCL), which would borrow funds from the Reserve Bank of India. The funds would be used to finance Indian companies implementing infrastructure projects and provide some cushion to companies planning to raise resources abroad.
Finance minister P. Chidamabaram said that even if $5-$6 billion of the reserves are used initially, it will be a major move forward. India’s forex reserves have swelled from $141.5 billion in 2005.
The plan to float two overseas subsidiaries of IIFCL was suggested recently by a committee chaired by Deepak Parekh, chairman of Housing Development Finance Corporation Ltd, India’s largest home loans company. The committee was set up to find ways to finance infrastructure.
The “government proposes to examine the legal and regulatory aspects of the recommendation, in consultation with RBI,” Chidambaram said during the Budget presentation. RBI currently manages India’s forex reserves, while IIFCL is the Centre’s wholly owned subsidiary which engages in infrastructure financing. RBI deploys India’s foreign exchange reserves in low-risk, low-reward tools such as deposits of other Central banks. Their investments earned 3.9% in 2005-06 and 3.1% in the year before.
The plan apes a similar one by the island-nation Singapore to better use its foreign exchange reserves. The Government of Singapore Investment Corporation was floated as a private company in 1981 to help Singapore manage its foreign excahnge assets. Temasek Holdings, another Singapore government arm, also invests in overseas assets.
The Economic Survey 2006-07 said managing foreign exchange reserves is one the biggest currency management challenges its facing.