Mumbai: India’s central bank governor Yaga Venugopal Reddy said it is possible to make a case for a sovereign wealth fund to manage the country’s foreign-currency reserves, which are the world’s fourth largest.

Accelerated gains in the country’s reserves are raising expectations for higher returns, Reddy said in Washington on Monday.

The Mumbai-based Reserve Bank of India released the copy of his speech on Tuesday. The returns from the reserves are constrained by the bank’s mandate, which emphasises “safety and liquidity,’’ he said.

“It may be possible to argue that a part of the reserves, which may be considered in excess of usual requirements, be managed with the primary objective of earning higher returns,’’ Reddy said.

“Given the limitations placed on the central bank by its mandate, it will be appropriate to bestow this responsibility on a different sovereign entity.’’

The so-called sovereign wealth funds, or state-owned capital pools, in Russia, China, Norway and elsewhere have grown in number to about 40 worldwide, managing as much as $3 trillion, according to estimates cited by US treasury officials. India held $299.15 billion in foreign-currency reserves as of April 11, compared with China’s record $1.68 trillion, Japan’s $987.7 billion and Russia’s $508 billion, according to data compiled by Bloomberg.

India’s total reserves rose 55.5% in 2007, beating a 29% gain in the previous year, as economic growth attracted increased investment from overseas.

Asia’s third-largest economy has expanded an average 8.7% a year since 2003, the fastest pace after China among major economies. Reddy said there are also “arguments for caution’’ on any plan to set up a sovereign wealth fund.

“It would be very difficult to reckon reserve adequacy in a dynamic setting and on that basis divert a part of excess reserves for a higher return from riskier assets,’’ he said.

India’s fiscal and currentaccount deficits also separate it from countries that already have wealth funds, as most of them have current-account surpluses, Reddy said.

The nation’s current-account deficit widened to $5.4 billion in the three months through December from $4.7 billion in the previous quarter, central bank data show.

Source : DNA