RBI increases overseas invst limit to $ 7 bn

The Reserve Bank of India has increased the overseas investment limit for mutual funds to USD 7 billion, from the earlier limit of 5 billion. But less than half that amount has been invested so far. It's a surprising move that could encourage more money leaving the country. The RBI has increased overseas investment limit for mutual funds to USD 7 billion, from the existing 5 billion. This translates to an increase of 150 million dollars per fund house.

Analysts say the RBI may be banking on more money flowing out of the country to help ease the pressure of rising forex reserves. The higher limit, they feel, may also push asset management companies to offer more diversified products.

However, mutual funds have, so far, invested less than USD 500 million abroad. This, despite a USD 1 billion hike in limit, just 8 months ago.

Only 2 of the 13 funds have exhausted their overseas limits. But despite available headroom, it's the fund houses that have been asking for larger limits.

Most of these fund houses invest just 35 percent of their assets in other markets, owing to unfavourable tax treatment.

By definition, funds that invest more than 65% of their assets in equities abroad do not qualify as Indian equity funds. Hence, no exemption from capital gains tax, and dividend distribution tax becomes applicable. Only if both go hand in hand, experts say, will diversification across global markets unveil its true potential.

By Pooja Meswani, CNBC-TV18