No hedging support to IDFs from forex reserves: RBI

The Reserve Bank has indicated to the government that it will not provide any hedging support to the infrastructure development funds (IDFs) from the country's foreign exchange reserves.

"The Reserve Bank as a policy will not provide any kind of foreign exchange hedging or support from the country's foreign exchange reserve for the forex risk of the IDFs," according to a note prepared by the central bank.

India's forex reserves stood at $285 billion as on September 2, 2011.

To facilitate investment in the infrastructure sector, the government had proposed to set up IDFs which could be in the form of a mutual fund or non-banking financial company (NBFC).

While the IDF-Mutual Fund would be regulated by the Securities and Exchange Board of India (Sebi), the RBI will be in-charge of the IDF-NBFC.

The requirement for funding of infrastructure during the 12th Plan (2012-17) has been pegged at $1 trillion, up from $500 million in the current plan.

The issues concerning setting up of IDFs were recently discussed at the high-level meeting of the Financial Stability and Development Council (FSDC).

To make the IDFs more effective, the Reserve Bank agreed to reduce the risk weights for such institutions to 50% from the earlier proposed 100%. It would mean that the IDFs would have to set aside less capital towards meeting the solvency norms.

"This [decision] would enable IDFs to lend twice as much to infrastructure without impacting intermediation costs," said the RBI's note.

RBI, however, insisted on a minimum entry capital for IDF-NBFC at Rs 300 crore, three times over Rs 100 crore proposed by the government initially.

Higher entry capital would ensure that the IDFs remained well capitalised.

Although the market regulator Sebi had notified the norms for IDF-Mutual Fund, RBI is yet to come out with the guidelines for IDF-NBFC.

The decision to set up IDFs follows an announcement by Finance Minister Pranab Mukherjee for 2011-12, with a view to accelerating and enhancing flow of long-term debt for funding the ambitious programme of infrastructure development in the country.

Source: Business Standard