BRICS bank needs to ensure easy realisation of bonds, say Rangarajan

Former RBI Governor C Rangarajan today said the bonds to be floated by the New Development Bank promoted by the BRICS countries should have liquidity to ensure their easy realisation.

Speaking after releasing a study undertaken by ASSOCHAM on 'BRICS Development Bank: Prospects and Challenges' here, he said that it was felt that some part of the resources could be invested in bonds raised by the New Development Bank.

"As all those developing countries, including India follow certain principles, while investing their foreign exchange reserves, because Foreign Exchange Reserves are a buffer. They should be invested only in paper, which is liquid and it can be realised very quickly. And that is the purpose of holding reserves," the former Chairman of the Prime Minister's Economic Advisory Council said.

 BRICS bank needs to ensure easy realisation of bonds, say Rangarajan

C Rangarajan. Image courtesy PIB

If some part of the reserves were to be invested in bonds floated by New Development Bank, these bonds will also have to be marketable, must have liquidity and must be have the highest grade given by the rating agents, he said.

For all these reasons, Rangarajan observed, it is important that the credibility of the new institution is well established and that of the bonds issued is very high.

Talking about the conditionalities set by banks while granting loans, Rangarajan said, "Banks, which are lending on the basis of the projects should restrict their conditionalities in relation to that particular project... At the same time proper viability of the project should be a major criteria while giving loans."

The Assocham study said that India has to situate itself as an equally "relevant voice" and strike a balance outside China-led or likely dominated multilateral structures.

This is in view of China having invested its huge foreign exchange reserves in different parts of the world, including in the developed nations and coming as a crucial founding member of the BRICS promoted New Development Bank.

The New Development Bank (NDB) being created by leaders of the emerging economies – Brazil, Russia, India, China and South Africa (BRICS) – shall have initial equity capital of $10 billion each.

However, by its sheer financial muscle power of $3.8 trillion of foreign currency reserves, China wields influence over critical components of the major financial channels, noted the ASSOCHAM study.

While the BRICS Bank–NDB should explore lending for private projects on the lines of World Bank arm, International Finance Corporation (IFC) and the membership of the bank should not be confined to the BRICS, at the structural level.

"The bank "should avoid the temptation of modeling itself on the lines of existing multilateral institutions with huge bureaucracy," it said.

PTI

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Updated Date: Dec 24, 2014 16:51:57 IST