nitinpahuja
Nitin Pahuja
By Archit Singhal
Sovereign wealth fund (SWF), a term described for government investment pools to buy into various assets in order to channelize national savings in to profitable investment. There is often confusion between sovereign wealth fund and foreign exchange reserves where SWF are fund held by the various state entities and foreign exchange reserves are currencies of various countries held by the central banks. Sovereign fund is defined for the purpose of management of national savings for the purpose of investment. In recent time due the massive build up of foreign reserves by developing countries for usually for the purpose of foreign exchange stabilization. These funds are usually created by countries having budgetary surplus or no international debts. Apart from Countries which are dependent on raw materials these fund may be created to survive economic crisis or to save for the future generations for example The Government Pension Fund of Norway. Other reasons may be for economical or strategic purposes.
Currently SWF it is be estimated at $2 trillion- $3trillion under management and expected to grow to $12 trillion by some estimate. The evolution from reserves to SWF would have several implication on various aspect of world economy especially in the financial market as these funds are becoming more equity oriented the demand for equity will rise. It is shown in recent time by the following example Abu Dhabi’s SWF invests $7.5 billion in Citigroup, Singapore pouring $9.72 billion in UBS or China sinking $3 billion into US private equity Blackstone group. These trends marks the rise in appetite of Asian and middle east money to pour into Sub prime effected banks which are engine for the world economy.
With World’s official reserves reached US$5 trillion mark and increasing at a US$80 billion a month. Oil exporters are accumulating official reserves at an unprecedented rate due to large Current account surpluses. Hence Oil countries are transferring a major chunk of their oil exports proceeds into Sovereign wealth fund. Similarly China and other Asian countries are accumulating similar reserves by huge balance of payments surpluses. Already SWF with US$2-3 trillion close of half of official reserves are on the way to become as big as the official reserves in time span of 5-6 years.
A CASE FOR INDIA’S FOREIGN EXCHANGE MANAGEMENT
India until 1991 undertook a restrictive and closed external sector policy with the rest of the world. It followed a restrictive capital mobility and discouragement of entry of foreign companies. It mainly kept the foreign exchange reserve for the essential imports like petroleum goods and food grains. After 1991 under the guidance of finance minister Dr Manmohan Singh undertook the economic reforms which aimed to move from import substitution to export promotion and to accumulate enough foreign exchange reserves for self sufficiency. India’s foreign exchange reserves (FER) since then has increased from US$6 billion at end-March 1991 to US$276 billion as on 4th January 2008. India ranks forth in the world in holding of FER in 2008 and an increase of 55% from a year earlier. The current account convertibility was achieved in 2004 and capital account is gradually, being liberalized.
Currently Reserve bank of India manages our FER. The RBI Act, 1934 enacts the framework for investment for FER which follows a conservative policy that requires the investment to be invested in foreign government securities, and that deposits are placed with other central banks, international commercial banks, and the Bank for International Settlement. India earned a mere 3.1 percent in US dollar terms on its FER as compared to 9.5 percent Singapore has earned on its fund.
The main criticism brought forward in forming a sovereign wealth fund is the source of our FER. Our increasing FER are due to inflows of foreign investment which consist more of portfolio investment (FII) then of foreign direct investment (FDI). As portfolio investment are very sensitive to dynamic economic condition and are hindered with the risk of capital flight. Hence FII are considered less stable then foreign direct investment. India’s FER consist a major portion of portfolio investment.
Recently RBI in consultation with Government of India has come up with US$5 billion fund for infrastructure funded from FER.A lot more steps are expected in this direction to use our FER in the most efficient manner. India with Resilient economy growing with 8% plus GDP growth will attract huge capital inflow in future making it increasing difficult for RBI to manage them. I guess we need to learn from other Asian and Gulf countries for their SWF model. As China did when it crossed the US$1 trillion mark making it increasing difficult for china to manage them. China considered copying the Singapore successful model in which Temasek Holding, a government funded company makes billion dollar investment in global enterprises of the world. Recently it formed a US$200 billion investment company for undertake its global ambition.
Sovereign wealth fund (SWF), a term described for government investment pools to buy into various assets in order to channelize national savings in to profitable investment. There is often confusion between sovereign wealth fund and foreign exchange reserves where SWF are fund held by the various state entities and foreign exchange reserves are currencies of various countries held by the central banks. Sovereign fund is defined for the purpose of management of national savings for the purpose of investment. In recent time due the massive build up of foreign reserves by developing countries for usually for the purpose of foreign exchange stabilization. These funds are usually created by countries having budgetary surplus or no international debts. Apart from Countries which are dependent on raw materials these fund may be created to survive economic crisis or to save for the future generations for example The Government Pension Fund of Norway. Other reasons may be for economical or strategic purposes.
Currently SWF it is be estimated at $2 trillion- $3trillion under management and expected to grow to $12 trillion by some estimate. The evolution from reserves to SWF would have several implication on various aspect of world economy especially in the financial market as these funds are becoming more equity oriented the demand for equity will rise. It is shown in recent time by the following example Abu Dhabi’s SWF invests $7.5 billion in Citigroup, Singapore pouring $9.72 billion in UBS or China sinking $3 billion into US private equity Blackstone group. These trends marks the rise in appetite of Asian and middle east money to pour into Sub prime effected banks which are engine for the world economy.
With World’s official reserves reached US$5 trillion mark and increasing at a US$80 billion a month. Oil exporters are accumulating official reserves at an unprecedented rate due to large Current account surpluses. Hence Oil countries are transferring a major chunk of their oil exports proceeds into Sovereign wealth fund. Similarly China and other Asian countries are accumulating similar reserves by huge balance of payments surpluses. Already SWF with US$2-3 trillion close of half of official reserves are on the way to become as big as the official reserves in time span of 5-6 years.
A CASE FOR INDIA’S FOREIGN EXCHANGE MANAGEMENT
India until 1991 undertook a restrictive and closed external sector policy with the rest of the world. It followed a restrictive capital mobility and discouragement of entry of foreign companies. It mainly kept the foreign exchange reserve for the essential imports like petroleum goods and food grains. After 1991 under the guidance of finance minister Dr Manmohan Singh undertook the economic reforms which aimed to move from import substitution to export promotion and to accumulate enough foreign exchange reserves for self sufficiency. India’s foreign exchange reserves (FER) since then has increased from US$6 billion at end-March 1991 to US$276 billion as on 4th January 2008. India ranks forth in the world in holding of FER in 2008 and an increase of 55% from a year earlier. The current account convertibility was achieved in 2004 and capital account is gradually, being liberalized.
Currently Reserve bank of India manages our FER. The RBI Act, 1934 enacts the framework for investment for FER which follows a conservative policy that requires the investment to be invested in foreign government securities, and that deposits are placed with other central banks, international commercial banks, and the Bank for International Settlement. India earned a mere 3.1 percent in US dollar terms on its FER as compared to 9.5 percent Singapore has earned on its fund.
The main criticism brought forward in forming a sovereign wealth fund is the source of our FER. Our increasing FER are due to inflows of foreign investment which consist more of portfolio investment (FII) then of foreign direct investment (FDI). As portfolio investment are very sensitive to dynamic economic condition and are hindered with the risk of capital flight. Hence FII are considered less stable then foreign direct investment. India’s FER consist a major portion of portfolio investment.
Recently RBI in consultation with Government of India has come up with US$5 billion fund for infrastructure funded from FER.A lot more steps are expected in this direction to use our FER in the most efficient manner. India with Resilient economy growing with 8% plus GDP growth will attract huge capital inflow in future making it increasing difficult for RBI to manage them. I guess we need to learn from other Asian and Gulf countries for their SWF model. As China did when it crossed the US$1 trillion mark making it increasing difficult for china to manage them. China considered copying the Singapore successful model in which Temasek Holding, a government funded company makes billion dollar investment in global enterprises of the world. Recently it formed a US$200 billion investment company for undertake its global ambition.