Reserve Bank of India (RBI) Governor Shaktikanta Das has hinted at the possibility of revising the overseas investment limit for domestic mutual funds, currently capped at $7 billion for the entire industry. Speaking at the 16th edition of the Mint Annual BFSI Summit and Awards, Das mentioned that while the rupee has stabilized post the initial pressure during the Russia-Ukraine war, the central bank is awaiting the opportune moment to make adjustments to the overseas investment limit for mutual funds.
“This request has been coming from the MF (mutual fund) industry from time to time,” said Governor Das. “We will take a call at the right time when we feel confident that the rupee is stable on a durable basis.”
The current cap of $7 billion for the industry was imposed on mutual fund companies, directing them to halt fresh investments overseas from 2 February 2022. Each asset management company is permitted to invest up to $1 billion in foreign securities within this overall limit. Although this limit was raised from $600 million in 2021, the industry-wide cap of $7 billion has remained unchanged since 2008.
A mutual fund manager, speaking on condition of anonymity, highlighted that the industry’s overseas investment limit was breached when the Indian currency faced pressure due to geopolitical factors, particularly the Russia-Ukraine war and global interest rate hikes. However, with the stabilization of the environment, the industry anticipates that the overseas investment limit will be increased soon.
One of the significant contributing factors to the exhaustion of the overseas limit was the heightened interest of domestic investors in participating in the US markets. This surge in interest occurred following a rally in US tech stocks immediately after the lows of the COVID-19 pandemic. Investors flocked into exchange-traded funds (ETFs) and funds tracking US indices and other foreign stocks, leading to the overall industry limit on overseas investments reaching its cap.
The industry has been advocating for an increase in the overseas investment limit, citing changes in market conditions and the stabilization of the rupee. The current geopolitical situation and economic factors have provided a more conducive environment for reconsidering the limit, as indicated by Governor Das.
The decision to revise the overseas investment limit for mutual funds is a nuanced one, balancing the interests of investors, market stability, and the overall economic landscape. Governor Das’s emphasis on waiting for confidence in the rupee’s stability on a durable basis reflects the cautious approach of the central bank.
The move to potentially increase the limit aligns with the broader objectives of facilitating investment opportunities for mutual funds and providing investors with diversified options. While the exhaustion of the current limit was influenced by specific market conditions, the proposed revision could enable mutual funds to adapt to evolving global scenarios.
As the central bank monitors economic indicators and assesses the resilience of the Indian currency, the industry awaits a decision that could impact investment strategies and opportunities for mutual funds. The forthcoming call on the overseas investment limit will likely be influenced by the broader economic outlook, ensuring a prudent and measured response to market dynamics.
Governor Shaktikanta Das’s indication of considering a revision in the overseas investment limit for mutual funds reflects a dynamic approach to aligning regulatory measures with changing market conditions. The decision, when made, will be a pivotal factor in shaping the investment landscape for mutual funds and providing investors with enhanced opportunities in the global market. The industry’s anticipation of a potential increase in the limit signals a proactive stance in adapting to evolving economic scenarios and investor preferences.