Mumbai: A high-level committee set up by the Planning Commission has asked the government to allow provident fund and insurance companies to invest in the overseas markets to mitigate their risks in the high volatile Indian markets.
Government’s attempt to allow provident fund to invest in the domestic equity market has not fructified so far due to strong opposition from the Left parties and trade unions.
“We should encourage greater outward investment by provident funds and insurance companies when inflows are high. Such diversification will make these funds more stable (give them less exposure to high volatility India markets),” said the draft report of the Committee on Financial Sector Reforms (CFSR), headed by former IMF chief economist Raghuram G Rajan.
With the forex reserves crossing $300 billion mark, and rupee appreciation against dollar by over 10% over the past one year, the Reserve Bank is under pressure to liberalise the outflow of capital.
The Plan panel said the relevant constituencies need to be persuaded that by restricting their investment options to domestic government securities, they are greatly limiting future returns and possibly increasing risk.
“At the very least, a first step will be to diversify across foreign government securities, so that we offset foreign inflows in to our government debt markets with outflow into foreign government debt markets, without these flow being driven by the RBI,” it suggested.
Besides, the report said, an Indian institutional investor should have the flexibility to buy an Infosys ADR in the US or to buy shares of Infosys in India or even IBM in the US.
“They should have flexibility to buy bonds issued by the governments all over the world,” it said.
This will expose institutional investors and their customers to international practises and ideas and increase competition faced by Indian financial markets. It will also set the stage for Indian institutional investors to sell financial products overseas, the committee said.
The report pointed out while individuals in India are allowed to invest $2 lakh overseas per year, this is operationally difficult due to restrictions that inhibit domestic and foreign financial firms from selling international financial products.
These relaxations could help the country by allowing outflows that keep the exchange rate from appreciating, the report said.