MFs expect RBI to raise $7-bn cap

The mutual fund industry is expecting the Reserve Bank to revisit the overall foreign investment limit of $7 billion plus $1 billion on foreign ETFs set way back on April 3, 2008 by the central bank.

Last month the mutual fund industry breached the $7 billion limit and further investments in overseas funds have been stopped since.

This has happened as retail investors are diversifying their asset allocation globally to take advantage of companies that are not present in India, a domestic fund house managing several global funds said.

"In view of the impending breach of the industry-wide overseas investment limit of $7 billion as currently permitted by the RBI, the Sebi has directed all asset management companies to stop accepting fresh inflows in schemes which have a mandate to invest in overseas securities without the option to invest in Indian securities," DSP Investment Managers said.

Contribution through lump sum investments and new SIPs are not being accepted in global funds run by the domestic mutual funds while old SIPs in global funds are being allowed by individual fund houses.

Each fund house has an individual limit set by regulators within the $7 billion over all investment limit that got breached in the second half of January 2022 while a separate $1 billion limit for the foreign ETF is still, intact allowing foreign exchange traded fund (ETF) investors to invest.

The per fund house limit has been raised regularly by the Sebi. In recent times that limit has gone up from $300 million to $600 million to $1 billion, which is the current limit.

"Conditions are very conducive for the RBI to increase the limits. It is just that the pace of inflows into schemes investing overseas has been brisk and the prospect of a breach in the investment limit appeared increasingly likely. Hence, the regulators sought to intervene pre-emptively," said Rajeev Thakkar, CIO and director, PPFAS Mutual Fund.

"The $7 billion limit was set in April of 2008 when the assets under management of the mutual funds in India were around Rs 5 lakh crore and India's forex reserves were around $309 billion. Today the same numbers are around Rs 37 lakh crore and $634 biilion," Thakkar said. "The simple reason for not increasing the limit for 14 years in my opinion is that there was no need to increase it,” he added.