After the curbs on foreign borrowings, Indian policymakers are now set to take recourse to another tool to tackle strong capital inflows. The government and financial sector regulators-RBI and Sebi-are close to finalising a proposal to converge the regulations on overseas investments by locals and mutual funds to encourage outward flow of capital.
The plan is to allow local investors to utilize the $100,000 limit under the liberal remittance scheme (LRS) to invest in equities abroad through mutual funds.
Earlier, under this scheme, individuals could invest in fixed income investment products such as deposits, property and stocks. But the response has been poor. Outflows in 2004 were just $28.3 million and $13 million up to November 2005 as returns in the Indian market are far superior to those of overseas ones.
By providing a window for local investors to invest a substantially higher amount-$100,000 abroad through mutual funds-policy mandarins are hoping that the resultant outflow will make it easier to manage the surge in capital inflows. Higher outflows will reduce the pressure on the monetary policy authority to mop up dollars and then suck out the liquidity created by sale of securities.
Indian individuals are now allowed to invest only rupee resources abroad through mutual fund schemes. This is different from the $100,000 liberal remittance scheme. However, investor appetite here too has been poor, prompting many fund houses to focus only on the local markets.
The government has fixed a limit of $2 billion for overseas investment by mutual funds, besides a ceiling of $1 billion for investments in foreign exchange traded funds.
The finance ministry, RBI and Sebi are in the process of converging the regulations-Foreign Exchange Management Act (FEMA) and Sebi rules on mutual funds-to facilitate greater outward investment.
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