RBI concerned about private equity flows
Tuesday, October 9th, 2007
Mumbai: RBI governor Reddy expressed concerns regarding private equity flows, while dwelling on the issue of setting up a currency stabilisation fund and sovereign wealth fund.
“We have been seeking comfort in the nature of investment associated with capital inflows through hedge fund channels and participatory notes. Similar issues could also be relevant to private equity flows,” said governor, Y V Reddy, in his address at the golden jubilee function of Foreign Exchange Dealers Association of India (FEDAI) today.
The objective of establishing a stabilisation fund is to smoothen revenue flows arising out of volatility in commodity export proceeds. A wealth fund is generally created amid current account surpluses by using a part of the foreign currency assets.
Reddy said that a large part of the capital flows into India were portfolio investments, while a significant part of foreign direct investment (FDI) was in the form of private equity and geared towards brownfield projects rather than greenfield investments.
So, capital account shocks, which would be independent of the country’s economic fundamentals or domestic macroeconomic environment, cannot be fully ruled out, he added.
India witnessed FDI inflows of $19.53 billion and portfolio investments of $7.3 billion in 2006-07. In his concluding remarks, the RBI governor stressed on the increasingly important role of stabilisation funds and wealth funds in global capital flows.
The operations of these funds have generated considerable interest among the policy makers and central banks. India has a stake in the on-going debate by virtue of its increasing importance in the global capital flows.
While it is essential to recognize the public sector nature of the stabilisation and wealth funds investing in India, it is also useful to study the evolving global practices in the approach of investee countries.
