Mumbai: India is closely watching the evolving global scenario of sovereign wealth funds, both in terms of policy and for deciding whether to set up one in India, Reserve Bank of India governor Y V Reddy said.

He said the country is yet to formulate a policy on investments by foreign wealth funds, although there are regulations for foreign direct investment and foreign institutional investments, Reddy said at a conference in Washington.

He, however, said it is possible to make a case for a sovereign wealth fund to manage the country's foreign-currency reserves - the world's fourth-largest.

India's foreign exchange reserves, the third-largest holdings in Asia, stood at a record $311.89 billion as of April 4, compared with China's record $1.68 trillion, Japan's $987.7 billion and Russia's $508 billion.

The returns from India's huge foreign currency reserves are limited by the Reserve bank's concern for ``safety and liquidity,'' even as accelerated gains in the country's reserves are raising expectations for higher returns, he said.

``It may be possible to argue that a part of the reserves, which may be considered in excess of usual requirements, be managed with the primary objective of earning higher returns,'' Reddy said, adding, ``Given the limitations placed on the central bank by its mandate, it will be appropriate to bestow this responsibility on a different sovereign entity.''

Reddy said the large foreign exchange reserve reflected an inability of the economy to fully absorb capital inflows, whereas most countries that had set up a sovereign wealth funds had built reserves through persistent current account surpluses or revenue gains from commodity exports.