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MUMBAI : Indian investors are making the most of a Reserve Bank of India (RBI) scheme to invest in overseas debt and equity with the RBI and the Securities and Exchange Board of India (Sebi) yet to take a call on raising the overseas investment limit for mutual funds, after the funds hit the limit of $7 billion.

Investors are availing the benefits under the liberalized remittance scheme (LRS) that allows resident individuals, including minors, to remit up to $250,000 in current or capital account transactions, every fiscal year.

Outflows for investment in international stocks and bonds under LRS rose to an all-time high of $747 million in FY22, up 58% from $472 million in FY21, according to RBI data. It also recorded an all-time high monthly remittance of $104.5 million in March, data showed.

The rise in overseas investments through the LRS route follows a Sebi advisory in January asking mutual funds to stop investments in overseas securities to ensure industry-wide limits were not breached. Mut-ual funds stopped investing in overseas stocks in February.

Under current rules, domestic mutual funds can invest up to $7 billion in overseas stocks and an additional $1 billion in exchange-traded funds (ETF). The rules set in 2007-08 have not been revised, despite a massive shift in investor appetite over the years. The Association of Mutual Funds in India (Amfi) is also in talks with Sebi and RBI to address the issue.

However, the ETF limit of $1 billion has not been met, and those schemes remain open.

“Sebi said it can act after RBI revises the limit, but there has been no headway in discussions with the RBI," said a mutual funds executive, seeking anonymity.

Experts said many factors must be considered before finalizing a limit. “RBI could peg it to the size of the economy or financial savings in the economy," said Ajay Bodke, an independent market analyst.

Investments in overseas securities allow domestic investors to diversify their portfolios and look for attractive risk-adjusted returns, he said. “Due to the limit being exhausted, one cannot invest in equities overseas through the mutual fund route now, depriving investors of the opportunity to diversify their holdings."

However, as India has a current account deficit, RBI has to be mindful of the outflow and has to consider an array of issues before making any move, Bodke said. Email queries to RBI and Sebi did not elicit any response till press time.

As a result, ETFs investing in overseas markets, such as Motilal Oswal Nasdaq ETF are trading at a premium to the net asset value (NAV), indicating a large unmet appetite for stocks in the US. The NAV of an ETF is the value on a given day and hence premiums suggest that people are willing to pay more in order to get exposure to US tech stocks. “There has been an upswing in global investing from India for a couple of years now," said Sitashwa Srivastava, co-founder, Stockal, a fintech enabling investments in international equities.

There are two reasons for rising interest, Srivastava said. One, brokers and fintech firms have made it easier to invest in global stocks in terms of logistics. Two, US market has been cheaper after the fall of technology stocks, making the valuations more attractive. The RBI plans a comprehensive review of LRS to address issues, according to its 2021-22 annual report released on 27 May.

 

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