Weighing pros and cons of SWF: RBI

Amid the global debate on sovereign wealth funds (SWFs), Reserve Bank of India Governor Y V Reddy has said that India is still weighing the pros and cons of setting up a government investment vehicle and is yet to consider a separate regulatory framework for their investment in Indian companies.

While acknowledging the demand for setting up an Indian SWF on the lines of ones in Singapore and China due to bulging foreign exchange reserves, Reddy during his address at a roundtable in Washington on Monday said RBI placed greater emphasis on safety and liquidity, which is the mandate it has.

At the same time, he also suggested the mode to use the over $300 billion forex reserves to set up a fund.

"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. If and when the country considers setting up of a SWF for the purpose, one of the methodologies could be to fund SWF by purchasing the 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," he said.

Of late, funds from West Asia and Singapore have been heavy investors in the US and Europe prompting some of them to consider checks on such investment. There has been considerable debate on the issue that the government is not too keen setting up a fund.

Reddy also listed the arguments against setting up an investment vehicle, which bought equity in companies.

First, he said, it is difficult to determine the excess part of the reserves given the dynamic nature. Besides, unlike most countries which have SWFs, India has consistently had a current account deficit and the reserves are on account of investment - direct as well as portfolio flows - and borrowings.