Sovereign wealth funds: can India join the elite club?

Abstract

The burgeoning foreign reserves of India render the opportunity cost of holding these reserves too high, making it imperative for India to seek a better way of deploying these reserves. In our study, represent the setting up of a Sovereign Wealth Fund as an option to manage these reserves better. Based on a study of the history, objectives, investment and the governance structure of existing SWFs around the world, we reached an understanding of the motivations and functioning of Sovereign Wealth Funds based on the situations in that country. In the case of India, special circumstances such as the nature of its foreign reserve surplus, the cost of holding these reserves, and the optimal level of the reserves were taken into account in arriving at an equation to determine the amount that India can potentially devote to a Sovereign Wealth Funds. Our analysis points to an SWF of US $ 30-40 billion and an investment policy primarily based on strategic considerations such as imbibing skills from the developed market and generating good will. Finally, we propose a management structure for this fund such that that the prevailing macroeconomic realities in India, and the fiscal and monetary policy prerogatives are given primacy in the administration and investment decisions of the Sovereign Wealth Fund.