Mumbai Indian investors are making the most of the Reserve Bank of India’s (RBI) investment plan with RBI and Securities and Exchange Board of India (Sebi) to invest in foreign debt and equities, for which the foreign investment limit is yet to be raised. No decision has been taken. mutual funds, after the fund reaches the $7 billion limit.
Investors are also receiving benefits under the Liberalized Remittance Scheme (LRS) that allows resident individuals, including minors, to remit amounts of up to $250,000 each fiscal year in current or capital account transactions.
According to RBI data, outflows for investments in international stocks and bonds under LRS increased to $74.7 million in FY12, up 58% from $472 million in FY2011. It also recorded an all-time high monthly remittances of $104.5 million in March, data shows.
The increase in foreign investment through the LRS route comes after an advisory by Sebi in January asking mutual funds to stop investing in foreign securities to ensure that the industry-wide limit is not breached. Mutual funds had stopped investing in foreign stocks in February.
Under current rules, domestic mutual funds can invest up to $7 billion in foreign stocks and an additional $1 billion in exchange-traded funds (ETFs). Despite drastic changes in investor appetite over the years, the rules set out in 2007-08 have not been modified. Association of Mutual Funds in India (Amfi) is also in talks with SEBI and RBI to resolve the issue.
However, the $1 billion ETF limit has not been met and these plans are open.
A mutual fund executive said on the condition of anonymity, “Sebi said it may take action after RBI revises the limit, but there has been no progress in talks with RBI.”
Experts said several factors should be considered before finalizing a limit. “The RBI can apply this depending on the size of the economy or the financial savings in the economy,” said Ajay Bodke, an independent market analyst.
He said investing in foreign securities allows domestic investors to diversify their portfolios and seek attractive risk-adjusted returns. “Because of the limitation, one cannot invest in equities abroad through the mutual fund route, thereby depriving investors of the opportunity to diversify their holdings.”
However, since India has a current account deficit, the RBI has to be careful with outflows and consider several issues before taking any action, Bodke said. Email queries to RBI and SEBI remained unanswered till press time.
As a result, ETFs that invest in overseas markets such as the Motilal Oswal Nasdaq ETF are trading at a premium to the net asset value (NAV), indicating a huge unmet appetite for stocks in the US. The NAV of an ETF is the value of a given day and therefore suggests the premium that people are willing to pay more for exposure to US tech stocks. “Global investments from India have picked up in the last few years, which enables investments in international equities,” said Sitashwa Srivastava, Co-Founder, Stockal.
Srivastava said there are two reasons for the growing interest. One, brokers and fintech firms have made it easier to invest in global stocks in terms of logistics. Second, the US market has become cheaper after declining technology stocks, making valuations more attractive. According to its 2021-22 annual report released on May 27, the RBI is planning a comprehensive review of the LRS to address the issues.