The time is ripe for India to start laying the groundwork for a sovereign wealth fund and invest in foreign assets, according to Deepak Parekh and Raghuram Rajan.
India’s foreign exchange reserves are at an all-time high, and among the largest in the world. That should be put to more lucrative use, Parekh, chairman of Housing Development Finance Corp. Ltd., said in a virtual conversation with former Reserve Bank of India Governor Raghuram Rajan, organised by Ascent eConclave 2020.
“The RBI’s earnings on foreign exchange assets last year was only 2.65% of its balance sheet. This year it will be lower. We have to find ways to earn higher than 1-2%,” Parekh said. “I think the time has come to look at a sovereign wealth fund to have savings for the future generation.”
A sovereign wealth fund, generally, is a special purpose investment vehicle that uses a country's forex reserves for strategic investments in overseas debt and equity markets. China, United Arab Emirates, Saudi Arabia, Qatar, Norway and Singapore are among those countries that have prominent sovereign wealth funds.
The slightly more cautious Rajan said a sovereign wealth fund could work but India will have to build a strong foundation before that happens. “What a sovereign fund would do is allow us from holding low return U.S. treasury bonds to holding equity,” he said. “Now again the RBI is not well-positioned to buy equity but we can set up a separate capacity when our forex reserves go up to invest in equity.”
We contemplated that (setting up a sovereign wealth fund) when I was RBI governor and decided that it was only early days. But we should prepare the capacity so that we can invest in a broader set of assets for the nation’s good.Raghuram Rajan, Former Reserve Bank of India Governor
Both Rajan and Parekh agreed that any such fund would need to have a capable team managing the investment decisions.
“We set up a sovereign wealth fund, say with 10% of our reserves, and set up a good team under the RBI that can buy equities and corporate debt. It has to be overseas investment, it can't be domestic equities or for infrastructure,” Parekh said.
According to Rajan, having a sovereign wealth fund invest in foreign assets could also help India solve another problem: a higher-than-desired level of the rupee. The domestic currency in real terms, Rajan said, is stronger right now than the ideal level to maintain India's export competitiveness.
“Some depreciation over time would be good to maintain our external competitiveness. One way to do it is to let more money go out,” Rajan said. “And one way for money to go out would be a sovereign fund that buys outside when a lot of money is coming in.”
Watch the full discussion between Deepak Parekh and Raghuram Rajan here:
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