India might create reserve investment corporation
4/21/2008
by Carl Linaburg
During a speech last week in Washington, the Governor of the Reserve Bank of India, Yaga Vednugopal Reddy reinforced beliefs that India has been in the works of creating a reserve investment corporation, a type of sovereign wealth fund. In his speech, Yaga Vednugopal Reddy stated that India’s foreign currency reserves, which currently stand as the World’s fourth-largest, are inhibited by the Reserve Bank’s policy of low risk and liquidity. Reddy continued his statement with, “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 type of sovereign wealth fund presumed to be created is a reserve investment corporation, which manages non-commodity based assets to increase returns on reserves. These assets, in the form of excess foreign currency reserves, were reported this past February by the IMF to be valued at U.S. $301.235 billion. The goal of the presumed Fund will be to earn higher returns through diversifying into equity investments rather than lower risk investments such as treasury bonds.
While Reddy’s speech expressed concerns of dynamic risks involved with managing a sovereign wealth fund, India has a bit of experience in the world of sovereign investment vehicles. The India Infrastructure Finance Company Limited (IIFC), established in August of 2004, provides long-term debt for financing world-class infrastructure in India. India’s Prime Minister, Dr. Manmohan Singh sits as chairman of the IIFC. The Ministry of Finance of India is credited for the creation of the IIFC after deliberations with the Planning Commission, and financial institutions. The creation of the IIFC was approved by the committee on infrastructure. This vehicle, which prefers Public Private Partnership Projects, has experience with raising funds from domestic and external markets and lending up to 20% of the needed capital for infrastructure projects. Aside from equity, the IIFC raises long-term debt through currency debt raised on the open market, debt from multilateral and bilateral institutions, and foreign currency debt through external commercial borrowings.
Although the IIFC differentiates itself on a multitude of levels from a sovereign wealth fund, there are high levels of experience that may be related to managing a new sovereign entity. One may question whether or not the IIFC is ready to take on the new responsibility of managing a sovereign wealth fund, but without the use of external managers there is no other internal government-owned authority more appropriate for the job.
The views in this publication are expressed by Carl Linaburg.
Carl Linaburg is cofounder and deputy director for the Sovereign Wealth Fund Institute.
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