Investments by Indian mutual funds in foreign securities were put on hold starting February 1, 2022, once they hit the limit of $7 billion, which was set back in 2008.
This halt occurred when India’s foreign exchange reserves reached a record high of $675 billion on August 2, 2024, up from $634 billion on January 28, 2022.
This raises the question: Will the Reserve Bank of India (RBI) increase the investment limit for mutual funds abroad now that foreign exchange reserves are at an all-time high?
Current Investment and Expectations
Currently, Indian mutual funds have invested around Rs 75,000 crore in various foreign assets, including funds of funds, direct equities, international ETFs, and domestic equity schemes.
RBI Governor Shaktikanta Das recently highlighted the record high in foreign exchange reserves.
Given this, there is speculation that the RBI might increase the investment limit for the mutual fund industry, which is valued at Rs 64 lakh crore.
Experts also note that the rupee’s value against the dollar remains stable.
Increased Attraction Due to Tax Rule Changes
The appeal of investing abroad has grown following recent tax rule changes. Finance Minister Nirmala Sitharaman announced a new tax regime in the Union Budget,
imposing a 12.5% tax on long-term capital gains from investments in funds of funds abroad, effective after 24 months.
This adjustment, announced in Budget 2023, is seen as a positive step for increasing the investment limit.
Rajul Kothari, a partner at Capital League, suggests this is an opportune moment for the RBI to raise the limit.
Reasons for Potential Increase
Pankaj Pathak, Senior Fund Manager at Quantum AMC, supports relaxing the investment rules.
He cites several favorable conditions: strong financial health of the Indian economy, a reduced current account deficit (below 1% of GDP),
increased foreign institutional investment, record-high foreign exchange reserves, and a stable rupee.
These factors collectively support the argument for the RBI to consider increasing the investment limit for domestic mutual funds interested in international investments.
