Sovereign wealth fund in Indian context

Abstract

Objective: With the size of the foreign exchange reserves of India reaching a massive figure of $285 billion recently, there is an important question doing the rounds among the Indian economists, i.e., how can these reserves be put to better use. The purpose of this study is to examine whether a Sovereign Wealth Fund is feasible in India with funding from its foreign reserves and also to find the different opportunities available to India to make use of its foreign exchange reserves. Given the fact that FII inflows are expected to surge all the more in the coming years, we wish to study the means available to make optimum use of these reserves. Methodology: In order to first find out whether an SWF is feasible in the Indian economic scenario, a comprehensive study was done on the various existing non?commodity SWFs existing in various countries of the world. Existing literature was studied to find out about the treatment of excess reserves and investment strategies of these SWFs which provided the basis of our study. The various tests of capital adequacy were done on the existing foreign exchange reserves in India to determine the optimal amount needed in the current scenario to safely meet India’s requirements for intervening in the market to contain volatility in the exchange rates and manage shocks in prices. This determination of the ideal size of forex reserves further helped us find out the size of excess reserves for which several alternate uses were found out. The study also included a thorough study on the opportunity costs of holding the reserves in its current form and an analysis was done on whether the tradeoff in investing the funds in the SWF was worth it. Following this, we studied the various opportunities for forex reserves available and the feasibility in the Indian context was determined. Results: After the study, it was concluded that India currently has excess reserves and the country is paying a high opportunity cost for holding these reserves in their current form. It was determined that an SWF of size $65 billion would be available for India to invest in the various avenues mentioned in the report.