Enhanced Foreign Investments Limit – Impact And Implications

Enhanced Foreign Investments in Indian market

Enhanced Foreign Investments in Indian marketForex reserves at an all-time high

By mid- January, India’s foreign exchange reserves touched an all-time high of about USD 322.135 billion. Foreign investments and funds inflow have been on an unprecedented high and gold imports have remained reasonably low due to the restrictions imposed by the government and the efforts of the RBI. The spike in forex reserves is a result of RBI’s aggressive dollar buying in an effort to keep the domestic currency stable. Current reserves seem adequate to cover over 8 months of imports. The previous occasion on which India’s forex reserves had reached USD 321 billion was in September 2011.

Foreign investment limit raised by RBI

This Tuesday, during the course of its sixth bi-monthly monetary policy review meeting, India’s central bank, the RBI (Reserve Bank of India) announced that the annual overseas investment levels for Indians would be doubled. The investment ceiling for individual investors has now been raised from USD 1,25,000 to USD 2,50,000 (approximately INR 1.5 crore). The RBI statement said, “On a review of the external sector outlook and as a further exercise in macro-prudential management, it has been decided to enhance the limit under the Liberalised Remittance Scheme (LRS) to $2,50,000 per person per year.

In August 2013, a plunging forex situation, a volatile rupee valuation, and a widening Current Account Deficit had prompted the RBI to reduce the annual LRS ceiling for individuals from USD 200,000 to USD 75,000. By June 2014, however, the efforts of the government and the RBI paid off and the economic stress caused by the CAD and low forex reserves had improved. The RBI raised the annual LRS levels to USD 1,25,000. According to the current policy revision, Indians can now buy USD 2,50,000 worth equity, debt instruments, gifts, or even real estate assets each year without the prior approval of the RBI. The LRS also allows individuals to maintain and hold overseas bank accounts in foreign currencies and carry out transactions from these.

Understanding the LRS

The current decision to enhance the LRS limit comes as a great benefit to those who look to routinely invest abroad. What is important here is that the USD 2,50,000 limit is for each individual. So a family of 4 members could comfortably invest up to USD 1 million a year. Buying houses and other real estate property abroad, without having to seek the permission of the RBI, is now easy. RBI policy says, ‘Remittances under the facility can be consolidated in respect of family members’ making it easier to acquire such assets. Now, the remittance limit set by the scheme is in addition to the various remittances allowed to individuals for “private travel, business travel, studies, medical treatment”. An individual’s spending limit on these has been specified in Schedule III of Foreign Exchange Management (Current Account Transactions) Rules, 2000. Currently an individual’s spends may go towards all these purposes under the scheme as well. Apart from raising the bar on LRS, Mr Rajan, the RBI Governor, also announced that he would work with the government to subsume all these various remittances under the now enhanced LRS ceiling. All remittances going out of India for charities and donations and gifts, however, may not be treated separately and are subsumed under the LRS limits. According to the RBI’s current policy, all interest or income generated out of the investments made under the LRS may be retained or re-invested by the individual investors who shall not be required to repatriate this income. For example, an individual investor who invests USD 2,50,000 abroad and earns interest out of this investment shall not be required to repatriate the interest amount and may re-invest it abroad.

Foreign investments and fund flow

Such a major enhancement of the LRS ceiling is a natural corollary to lowering inflation figures, a stable domestic currency, and a considerable improvement in the macro-economic environment of the nation, said RBI Governor Mr. Rajan. The alarming current account deficit (CAD) scenario is a thing of the past and the CAD is estimated to be 1.3 percent this year. Expectations are this will further reduce in the years to come. It may also be assumed that a change in leadership both at the union government level and at the helm of the central bank have helped immensely when it comes to regaining the trust of foreign investors.

Foreign fund flows into the country have shown a major upsurge over the past few months. Acqusition of Indian equities and bonds by FII has gained considerable pace. In January 2015, Indian capital markets saw an inflow of INR 33,688 crore, invested by foreign investors. This is the highest figure coming from overseas in the past 6 months. While we can only say that the timing is right for Mr. Rajan to enhance the LRS, India’s impact on foreign markets is now to be seen in the months to come. What Mr Rajan and Mr. Jaitley may want to watch closely, however, is the turn of the domestic currency exchange rates. While steady, the rupee still seems very vulnerable and prone to fluctuations.

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