IndiaÆs central bank gives offshore investing a lift

In what is being hailed by executives in IndiaÆs $76 billion mutual funds industry as a step toward the inexorable freeing of the rupee, the Reserve Bank of India has widened the scope for domestic funds and individuals to invest overseas.

The RBI has raised the quota for the domestic funds industry to invest abroad from $3 billion to $4 billion, and doubled the amount that individuals can place overseas on an annual basis from $50,000 to $100,000 per person.

The central bank is concerned about the inflow of foreign reserves and an appreciating rupee, and has been opening the door for Indians to invest in foreign-currency assets. Fund executives in Mumbai say this weekÆs liberalisation is a further step toward full convertibility of the rupee, which they expect to take place in the next five years or so.

For fund managers, this widens the door for overseas investments, which have only been allowed since last year. So far the funds industry has gotten nowhere near its old $3 billion quota.

Vivek Kudva, president at Franklin TempletonÆs India business, says the industry has only met about 10% of its previous allotment. Franklin Templeton was the first last year to introduce a mutual fund investing partly in global equities, and has about $100 million worth invested abroad, or about one-third of the total.

Reasons for the slow uptake include the appreciation of the rupee, the strong performance of the Indian stock market, and simply the lack of supply. Players such as Unit Trust of India and, as of last week, Fidelity Investments have also offered funds with offshore allocations. But most players have been content to wait and see before taking the plunge; and local firms need to either develop a capability for overseas investment or tie up with global houses, as Kotak Asset Management has just done with T. Rowe Price.

ôDemand exists for offshore investments but only a few fund houses have products,ö says Mukul Gupta, CEO at Birla Sun Life Asset Management in Mumbai. ôThe potential is enormous. This is just the tip of the iceberg.ö

Another reason for the slow uptake is that, for wealthy individuals with an interest in diversification, $50,000 isnÆt that much. But the new measure doubling this annual allotment may spur more eligible investors to consider offshore options, says Kudva.

And although only a handful of offshore products exist, more fund houses will develop these, because they offer a way to differentiate oneself, adds Prateek Agrawal, vice president and head of equities at ABN Amro Asset Management in Mumbai.

The RBI announced the liberalisation measures as part of its anual monetary policy address. The central bank decided to leave interest rates unchanged, with overnight call rates around 8.25% and the 10-year government bond yielding 7.99%. Fund managers expressed relief at the decision to pause a string of rate hikes. The RBI has moderated its inflation expectations to below 5%.