Sovereign Wealth Fund and Foreign Exchange Management<br />By <br /> Group 2 <br /> IFT – Section D<br /> Deepika Dipika<br /> Dibyakant Gaurav<br /> Kirti Mihir<br />
SWF - Definition<br />An investment fund managed by a government or another organization on behalf of a nation or sovereign state.<br />It is composed of Global Financial Assets:<br />Stocks<br />Bonds<br />Property<br />Precious metals<br />
Purpose of SWF<br />Sovereign wealth funds can be characterized as maximizing long term return, vis-à-vis the foreign exchange reserves serving liquidity management.<br />To hold, manage, or administer assets to achieve financial objectives<br />Reduce the volatility of government revenues <br />Counter the business cycles' adverse effects on the national economy <br />To build up savings for future generations <br />Assist monetary authorities dissipate unwanted liquidity <br />
Sources of SWF<br /><ul><li>Current Account surpluses
Facts & Figures<br />53 SWFs, Estimated at $3.8 Trillion<br />International Working Group of <br /> SWFs<br />Funding by Source <br /> Oil & Gas-61%<br /> Others-39%<br />Funding by Region<br /> Middle East-44%<br /> Asia-35%<br />
Largest Funds – by AUM<br />SOURCE- WWW.SWFINSTITUTE.ORG<br />
Linaburg-Maduell transparency Index<br />Wealth Fund Institute by Carl Linaburg and Michael Maduell.<br />Method of Rating Transparency<br />Based on 10 Essential Principals 2nd Quarter 2009 LMTI ratings<br />SOURCE- WWW.SWFINSTITUTE.ORG<br />
SWF - Strategy<br />No single well defined strategy.<br />Objective specific<br />Focus on emerging markets and diversification<br />Equity investments: Portfolio, Index and Mixed approach<br />Example: ADIA, Temasekand CIC<br />
Impact on global Financial stability<br />POSITIVE – Reduce volatility and Support function.<br />NEGATIVE – Currency movement and announcement effect.<br />Role similar to those of Hedge funds and Financial Institutions. <br />
Myths About SWF<br />Sovereign wealth funds are all the same in their opacity<br />Sovereign wealth funds are a net benefit to the international financial system<br />Sovereign wealth funds are not like hedge funds<br />
FOREX Management Indian View<br />Motives of Maintaining FOREX Reserves<br /><ul><li>Maintaining Confidence in Monetary and exchange rate policies
Enhancing capacity to intervene in FOREX markets
Comfort zone provision for Market participants</li></ul>P- Notes Issue October 2007 to August 2008<br />Huge reserves gone drastically down during Financial crisis.<br />Indian FOREX reserve investment in US treasuries which is lowest in the world.<br />
What to do with these reserves in future?<br />Keep some amount of reserves for Imports - 3 to 6 months , some for Contingency <br />For rest reserves the Options are:<br />Accumulate reserves<br />SWF of INDIA<br />Equities & Fixed income securities<br />Energy Security for future growth<br />IMF & World Bank<br />Investment in Own country<br />Infrastructure<br />
Indian SWF imagination or Reality……<br />RBI with another independent entity to manage<br />Initial $ 5 Billion corpus<br />Can reduce burden of Oil & Gas subsidies like Administered price mechanism.<br />State bank of India in talks with major SWF’s of the world. <br />
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