Mutual funds demand easing RBI's limit on overseas investments
The Securities and Exchange Board of India (SEBI) has mandated mutual funds to cease accepting subscriptions for investments in foreign exchange-traded funds (ETFs) from April 1, 2024. This directive, dispatched on March 20 to the Association of Mutual Funds in India (AMFI), is designed to avert exceeding the $1 billion cap on such investments. Now, there are demands to raise the overseas limits on the same.
Growing demand for higher overseas investment limits
This directive emerges amid escalating calls for an increase in the foreign investment limit enforced by the Reserve Bank of India (RBI). The existing limit, established in 2007-08, has been fully utilized by mutual funds for over two years without any augmentation from the RBI. This has resulted in missed opportunities like NVIDIA Corporation's share price skyrocketing by 245% within a year.
Indian mutual funds' foreign equity assets hold high value
The foreign equity assets of Indian mutual funds, which include international fund of funds (FoFs), direct equities, international ETFs, and domestic equity schemes, are currently estimated at over Rs. 70,000 crore. Despite this substantial valuation and repeated appeals from the mutual fund sector, the RBI has remained firm on its stance against raising investment limits.
Industry leaders champion higher investment limits
Nilesh Shah, Managing Director of Kotak Mutual Fund, advocated for a higher limit, referencing increasing forex reserves. He pointed out that money invested in foreign securities via mutual funds can be repatriated to India, unlike funds transferred through the Liberalised Remittance Scheme (LRS). Pratik Oswal, head of passive funds at Motilal Oswal AMC, also endorsed a "calibrated" increase in limits and underscored the advantages of investing in international stocks via mutual funds.
RBI's position on investment limits remains steadfast
Despite the mutual fund industry's lobbying for higher limits, the RBI has not indicated any willingness to revise its stance. Some industry insiders believe that SEBI backs their proposal to raise the limits, but the ultimate decision lies with the RBI. Economists propose that the central bank's cautious approach is intended to prevent capital outflow and safeguard retail investors.
