RBI to lend $5 bn for infrastructure

NEW DELHI: RBI will lend $5 bn to the government from a staggering foreign exchange reserves of $212 bn for improvment of infrastructure.

"We have succeeded in convincing the RBI to lend five billion dollars from the forex reserves to the India Infrastructure Finance Company Ltd (IIFCL), a 100 per cent state-owned company, which would finance the infrastructure projects of Indian companies, especially for capital imports," a finance ministry official told PTI.

The five billion-dollar loan constitute less than 2.5 per cent of the existing foreign reserves of the country.

RBI's decision follows Finance Minister P Chidambaram's assurance that the borrowed forex reserves would not be spent in the domestic market that could lead to increase in money supply and later inflation.

The sources said government has assured a guaranteed return of more than 3.5 per cent on five billion dollar borrowing.

The Finance Ministry has also taken legal opinion to ensure that these funds could be utilised by the government, the source said.

The Committee on Infrastructure Financing, headed by HDFC Chairman Deepak Parekh, had earlier recommended that a part of the forex reserves could be utilised for infrastructure funding. The proposal was accepted by the government this year.

The Parekh committee has also revised the target for infrastructure investment to 475 billion dollars at current prices.

The sources said the proposed overseas subsidiary of IIFCL will fund capital imports of local firms at competitive rates. The move has long been in the making in a bid to ease the pressure on the build-up of forex reserves.

The idea of using forex reserves for improving country's infrastructure was mooted by deputy chairman of Planning Commission Montek Singh Ahluwalia two years ago. Earlier, RBI was not in favour of the proposal.

In recent months, the government has been considering other innovative measures to ensure the flow of funds to the infrastructure sector, Finance Ministry official said.

To begin with, the Citigroup and Blackstone have set up a 5 billion infrastructure fund, in which two Indian companies IDFC and IIFCL are major partners.

Global giant General Electric (GE) also plans to set up a 300-500 million dollar infrastructure fund.