India may tap FX reserves for infrastructure projects

By Joe Leahy
Financial Times, London
Sunday, May 13, 2007

http://www.ft.com/cms/s/f62f91a0-017d-11dc-8b8c-000b5df10621.html

MUMBAI -- India's growing currency reserves could be used to finance local infrastructure projects if a scheme being set up with 3i, the UK-based private equity group, receives central bank approval.

Last month, 3i announced a strategic partnership with the government's India Infrastructure Finance Company to invest together in projects on a case-by-case basis. The private equity house is set to begin pre-marketing for its $5 billion fund.

The government is now studying a proposal to use the IIFC to channel some of India's foreign currency reserves into infrastructure. If the scheme is approved by the central bank, the IIFC is likely to deploy some of the reserves to provide credit support for projects set up in co-operation with 3i and other partners.

The Indian government has forecast the country needs $320 billion in infrastructure investment in five years as rapid economic growth stretches India's long-neglected ports, roads, airports, and power utilities.

This has led to a high-level push to use the some of the country's burgeoning foreign reserves, which have increased 26 percent in the past year to $204 billion, for infrastructure investment as an alternative to raising new government debt offshore.

P. Chidambaram, finance minister, said in his budget speech in February that he was studying a proposal for the IIFC to set up two subsidiaries that would borrow the reserves from the Reserve Bank of India and use them to provide credit support to infrastructure projects.

The proposal could prove controversial. A Moody's Investors Service report said any plan to invest the reserves could face hurdles because the RBI may not fund government debt.

The partnership with 3i followed an earlier announcement that the IIFC is setting up a separate $5 billion fund with Citigroup, Blackstone, and another state-run organisation, the Infrastructure Development Finance Company.

3i will provide the equity for any project and the IIFC debt financing on commercial terms, probably as part of a syndicate of state-owned Indian banks and other institutions.

3i is expected to inject $500 billion into the infrastructure fund.

Anil Ahuja, its managing director and co-head of Asia, declined to comment on the fund, saying only that the group's strategic partnership with the IIFC was a "huge stamp of approval."

The IIFC and the RBI declined to comment, saying proposals on the reserves were still under consideration.

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