With the advent of financial globalization, an argument—to be precise, a syllogism—has taken strong roots: developing nations need foreign capital to grow; but such inflows can also result in unintended consequences that can prove to be costly if the developing countries do not pursue prudent macroeconomic policies and appropriate regulations; and, therefore, developing countries must be careful in managing the inflow of foreign capital.

This is palpable even in the context of managing our surging foreign exchange reserves, which have, in the recent past, touched a figure of $316 bn. As the forex reserves are mounting up, the concern for the losses—arising by virtue of the Reserve Bank of India investing the dollars mopped up by it against the sale of government securities and investing them in the US treasury bills that give lesser return vis-à-vis the government securities back home—suffered by the RBI in managing the reserves has attracted the attention of many.

If the current growth of $100 bn per annum under forex reserves is a reliable indicator of the future accretions, this problem is all set to get further exacerbated. Indeed, this has already prompted many to suggest that India should set up a Sovereign Wealth Fund (SWF)—a state-owned fund that acquires stocks, bonds, property and other financial instruments for better returns in the global financial markets. Looking at the kind of losses that the RBI has been suffering from the management of forex reserves for the last five to six years and the kind of returns that the SWFs floated by countries such as Abu Dhabi, China and Singapore are generating by investing trillions of dollars in different kinds of assets in the US and other developed and developing world markets, a strong debate has been set off from within the country for creation of a similar fund by the RBI.

The Analyst Magazine, Forex Reserves, financial globalization, macroeconomic policies, surging foreign exchange reserves, Reserve Bank of India, Sovereign Wealth Fund, SWF, global financial markets, Foreign Institutional Investors , FIIs, Information Technology, IT.