Will RBI enhance limits for international mutual funds in today's monetary policy announcement?

On February 2, the schemes investing in overseas securities and mutual funds had to stop accepting flows from investors, as they had come close to exhausting the limits for overseas investing.

Mutual fund (MF) industry executives are hoping that the Reserve Bank of India (RBI) announces enhancing of overseas investing limits for international schemes during its monetary policy announcements tomorrow (February 10).

In the monthly call held by Association of Mutual Funds in India (AMFI), its chief executive NS Venkatesh shared that the decision on enhancing overseas investing limits for international schemes will be taken by RBI after factoring in the forex reserves of the country.

Also read: What does restriction of flows in international schemes mean for mutual fund investors?

The head of a fund house, which had to stop accepting flows as new foreign investments were disallowed, said they were looking forward to RBI’s monetary policy for a resolution.

Industry executives say as an immediate measure the limits can be doubled.

“It is important to resolve this limits issue soon as we are not able to invest in the big US tech stocks, which are going through a price correction right now. Many mutual funds were close to exhausting their limits, but had not yet fully exhausted it. So, doubling of limits should help the industry to continue deploying funds in global markets for foreseeable future,” said chief executive officer of second fund house, requesting anonymity.

“The regulators can later think of creating a dynamic model so that the limits are raised as and when needed,” he said.

Senior executive of third fund house said creating a dynamic limit may be difficult as RBI needs to track several macroeconomic variables on an ongoing basis such as forex reserves, fiscal deficit, current GDP, estimated growth of economy and then decide on an appropriate number for MF industry.

Venkatesh, too said that AMFI has not demanded any particular number of the new limit or any dynamic variable. “This is for the RBI and SEBI to decide how much the limits should be raised,” he said in AMFI’s monthly call when we asked if the mutual fund industry might just exhaust the new limit, in months or in just few years.

Why schemes stopped accepting investors’ money?

On February 2, the schemes investing in overseas securities and mutual funds had to stop accepting flows from investors, as they had come close to exhausting the limits for overseas investing.

The aggregate industry-level limit for investing in overseas securities and mutual funds is $7 billion, which is $1 billion for each fund house.

Few international schemes can still accept flows, which invest in overseas-listed exchange traded funds (ETFs). This is because for funds investing in overseas-listed ETFs, there is a separate limit of $1 billion, which is $300 million for each fund house.

Also read: This US fund is not yet affected by SEBI’s overseas investing limits. Should you invest in its NFO?

Overseas investing has grown in popularity in recent years, as investors are gradually starting to understand the importance of geographical diversification in their portfolio. Mutual funds have also launched several new fund offers, which focus on international stock markets.