If the RBI decides to raise the limit to $50 billion, it could open up new opportunities for Indian investors by giving mutual funds a shot at global markets. “But the catch is, this could lead to more money flowing out of India, putting pressure on the rupee
In a recent social media post on X, Deepak Shenoy, Founder and CEO of Capitalmind, a financial advisory firm, said that the Reserve Bank of India (RBI) should increase the limit for mutual funds investing in foreign stocks from $8 billion to $50 billion, arguing that the cap has remained unchanged since 2009.
The Indian mutual fund industry reached its overseas investment limit of $7 billion in February 2022, leading Sebi to temporarily halt fresh investments abroad to prevent a breach.
Additionally, a separate $1 billion limit was set for investments in overseas exchange-traded funds (ETFs). This limit is set by the RBI and caps industry-wide mutual fund investments in foreign assets, with individual AMCs restricted to $1 billion each.
Investor interest in global opportunities, especially in sectors like AI/tech, semiconductors, and electric vehicles, has fuelled demand for international exposure. “While Sebi allowed some overseas investments to resume in June 2023, opportunities remain limited by these caps.
Some funds, like Nippon India AMC, even suspended lump-sum investments after hitting individual ceilings, though SIPs were unaffected last year,” says Amitabh Lara, Executive Director & Unit Head - Mumbai, Anand Rathi Wealth.
RBI’s $8 Billion Cap: Balancing Growth And Stability
RBI set an $8 billion cap back in 2009 to keep things in check, primarily to protect the Indian rupee from unnecessary pressure. The idea was to avoid large capital outflows that could destabilize the currency and the economy. “It has not been updated since, likely because of the risks of global market volatility and geopolitical tensions which are still very real. For now, these limits mean Indian mutual funds and investors miss out on tapping into the international markets, keeping their portfolios concentrated to domestic equities,” says Lara.
If the RBI decides to raise the limit to $50 billion, it could open new opportunities for Indian investors by giving mutual funds a shot at global markets. “But the catch is, this could lead to more money flowing out of India, putting pressure on the rupee. While it could boost portfolio diversification and returns partially, it might also strain foreign exchange reserves. The RBI will have to strike a balance between these benefits and the risks of economic instability,” says Lara.
What Would It Mean For Investors
“For retail investors, this could mean more options to invest in international companies and markets, adding variety and growth potential to their portfolios,” says Lara. However, global investments come with greater risks of currency swings and political uncertainties. Additionally, the cost of investing via fund of funds (FOF) mode is also higher.
Investors also need to understand that compared to matured markets India’s GDP growth story is way stronger. Thus, investors will need to stay sharp and weigh the pros and cons before diving in.