"If a small part of our forex reserves is used to set up a sovereign wealth fund and deployed strategically, this can yield steady long-run returns and at the same time enhance India's policy role in the world," Basu told PTI.
Sovereign wealth funds have existed for a long time, though they got this name only six or seven years ago.
Recently, the industry ministry in a discussion paper suggested that India should consider setting up a sovereign wealth fund to finance infrastructure which would require an investment of USD 1 trillion in the next five years.
The paper recommends that government should use a part of its foreign exchange reserves to set up the sovereign wealth fund as has been done by countries like China, Korea and Singapore.
Basu said sovereign wealth funds could be set up under the control of either the government or the Reserve Bank of India (RBI).
"A sovereign wealth fund does not necessarily mean money moved from the RBI to the government," he said.
Basu said, "The returns from the first USD 15 or 20 billion set aside for this can be enormous."
India has one of the biggest foreign currency reserves in the world at USD 320 billion. It is, however, far less than USD 3.2 trillion held by China and USD 1 trillion by Japan.
The RBI, however, has been expressing reservations on setting up a sovereign wealth fund. The central bank wants the government to set up a sovereign wealth fund from the budget and not out of forex reserves.
Citing example of Singapore, Basu said, "There are countries with relatively small foreign exchange holdings that have operated very successful sovereign wealth funds."