With mutual funds exhausting their $1 billion limit to invest in overseas Exchange Traded Funds (ETFs) this week, domestic investors can no longer diversify across the borders through the mutual fund route. The $7 billion limit that the Securities Exchange Board of India (SEBI) had set for Indian funds to invest in overseas stocks and bonds had run out in January 2022, pushing investors to explore ETFs in the past year. The mutual fund industry has been knocking at the regulators’ doors to enhance its overseas investment limits. SEBI and Reserve Bank of India (RBI) must favourably consider these requests.

Today, there is a good case for regulators to open the doors wider to domestic investors seeking to diversify overseas. Current limits for mutual fund investments overseas were set way back in April 2008. Since then, there has been a significant improvement in India’s foreign exchange reserve position as also its ability to fund its current account gap with capital flows. When these limits were set, India’s foreign exchange reserves stood at about $300 billion, less than half of today’s levels of $640 billion. Thanks to its ability to attract stable long-term Foreign Direct Investments (FDI) in recent years, India was sitting pretty on about $528 billion in FDI capital by September 2023 (latest RBI data) compared to the FPI stock of $259 billion. In March 2008, the stock of FDI capital at $115 billion was below FPI capital at $119 billion. Remittances from India’s diaspora have also risen steadily in recent years, from under $200 million in 2008 to over $120 billion in 2023, providing a substantial cushion to both forex reserves and the current account.

With the imminent inclusion of Indian government bonds in global benchmarks with effect from June this year, India has begun to attract substantial FPI debt flows along with its equity flows. The $6.6 billion of debt inflows so far this year have prompted RBI to intervene in currency markets to ward off upward volatility in the rupee. Rupee appreciation can undermine the headway India has made in services exports amid a cloudy global outlook for goods trade. In this backdrop, a calibrated opening of the doors to dollar outflows through regulated vehicles such as mutual funds to counter-balance inflows makes sense.

Policymakers should also recognise that, outflow of dollars towards investments in mutual funds cannot be equated with expenditure towards travel, tuition fees or maintenance of relatives, which make up the bulk of outflows under the Liberalised Remittance Scheme (LRS). While LRS outflows are a permanent flight of capital, investments create wealth for domestic investors. Mutual fund investments are also likely to be redeemed at a future date, with the capital returning. Allowing Indians to take the help of professional managers to own a basket of listed foreign securities through regulated vehicles, is preferable to their punting on risky crypto-currencies and offshore forex markets on their own.