The Existing Limits on Overseas Investments
The RBI currently imposes a cap on the amount Indian mutual funds can invest in foreign securities, with a total industry-wide limit of $7 billion and a $1 billion cap per individual fund house. Additionally, a separate $1 billion limit is set for investments in overseas exchange-traded funds (ETFs). These limits have been in place since 2008, and investment in international securities by Indian mutual funds was suspended on February 1, 2022, when the $7 billion industry cap was reached.
Given the record level of India’s forex reserves, there is growing sentiment within the MF industry that the RBI should revisit and possibly raise these caps.
Arguments for Increasing the Limits
India’s mutual fund industry, which manages assets worth approximately Rs 64 lakh crore, currently holds around Rs 75,000 crore in overseas equity investments. These investments include international fund of funds (FoFs), direct equities, international ETFs, and domestic equity schemes. With the substantial increase in forex reserves, many believe that raising the overseas investment limits is both timely and necessary.
The stability of the Indian rupee in recent years further bolsters the case for enhancing these limits. By allowing higher overseas investment, investors would gain more options to diversify their portfolios, which is particularly valuable in mitigating risks during potential market downturns.
Increasing the cap would also cater to the rising demand among Indian investors for global diversification. As international markets present a variety of opportunities, higher investment limits would enable investors to better manage risks and capitalize on global economic growth.India’s Strong Macroeconomic Position
India’s macroeconomic fundamentals are currently robust, characterized by a low current account deficit (below 1% of GDP), strong foreign institutional investment inflows, and a substantial cushion provided by the forex reserves. These indicators suggest that the Indian economy is well-positioned, potentially justifying a relaxation of the existing restrictions on overseas investments.Additionally, recent changes in the budget have made international investments more appealing. The taxation of international Fund of Funds (FoFs) has been revised to 12.5% on long-term capital gains after 24 months, a reduction from the higher marginal rate imposed the previous year. This adjustment has increased the attractiveness of international investments for Indian investors, further amplifying the call for higher limits.
Weighing the Risks and Benefits
While the rationale for raising overseas investment limits is compelling, it is essential to consider the associated risks. The Indian rupee has experienced pressures in the past, and an increase in overseas investments could lead to capital outflows that might destabilize the currency. Furthermore, the global economic environment remains volatile, with geopolitical uncertainties and market fluctuations presenting challenges to international investments.
Thus, while raising the investment limits could provide significant advantages, it also poses potential risks that need to be carefully evaluated. The RBI is likely to consider these factors before making a decision, seeking to balance the need for greater investment flexibility with the imperative of maintaining economic stability.
Final Thought
With India’s forex reserves at a record high and the economy demonstrating robust growth, the case for the RBI to consider raising the overseas investment limits for mutual funds is strong. Such a move would offer investors enhanced opportunities for diversification and risk management on a global scale. However, any decision to increase these limits will require a nuanced assessment of the potential risks and the ongoing need for financial stability in the Indian economy.
As the mutual fund industry and investors await the RBI’s decision, the hope is that the current favorable economic conditions will lead to more significant investment opportunities in global markets, benefiting both the industry and the broader economy.
(The author Chakravarthy V. is Cofounder and Executive Director, Prime Wealth Finserv. Views are own)
