Should We Employ Our Forex Reserves To Fund Big Infra Push That Can Revive Growth?

By Author: Resurgent India
Total Articles: 1
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For infrastructure development, we require long-term funds and carving out the funds out of reserves will involve a 'trade off' against the availability of cushion, as these funds are not in the nature of long-term surplus available. Asset-liability management issues similar to those faced by banks will also need to be assessed.

One possible use of these reserves can be thought to be in the field of hedging activities. Financing institutions having foreign funds require provisions to be made for hedging against their forex borrowings. Against these reserves, RBI can provide a backup facility to infrastructure funding institutions and the cost thereof at present borne by these institutions will get reduced. This will indirectly support the financial institutions and the benefit can, in turn, be passed to the ultimate developers of infrastructure projects. This possible mechanism needs further deliberations to evolve a workable solution.

While the possible usage of foreign reserves for infrastructure development funding and the modalities evolve over time, we should continue to rely upon instruments/sources ...
... like INVITs, Infrastructure debt funds, credit enhancement guarantee funds. etc. This will facilitate the timely availability of crucial funding of infrastructure.

The author is managing director, Resurgent India, an Investment Bank and a SEBI registered Category I Merchant Bank

The normal range of infra projects funding is quite long ranging between 15 to 25 years depending upon terms of the award of the contract by the authorities like NHAI or state-level power agencies etc. As such, ideally speaking, pension funds and insurance funds should normally come forward for the funding of such projects since they are having long-term resources as a backup. However, in India, a major portion of the funding has so far been through the banking system and some specialised NBFCs like PFC, REC IREDA etc. But Banks have sectorial limits and a high percentage of NPAs to contend with.

In these circumstances, looking at alternate avenues of funding is very important. NHAI is looking at dollar funding and the highways minister has spoken of plans to explore the possibilities of deploying foreign exchange reserves for long-term infrastructure funding.