The Reserve Bank of India (RBI) doubled the annual overseas investment ceiling for individuals to $2,50,000 from $1,25,000 on Tuesday as foreign exchange reserves have scaled an all-time high.
“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 Liberalized Remittance Scheme (LRS) to $2,50,000 per person per year,” the RBI said in its Bi-Monthly Monetary Policy Statement.
LRS allows Indian citizens to acquire and hold shares, debt instruments or other assets such as real estate overseas without the RBI’s approval. The Central bank reduced the ceiling for remittance from $200,000 to $75,000 per person in a year in August 2013 due to the surge in the current account deficit, which had sent the rupee into a tailspin. However, with some improvement in the forex situation a year later, the LRS limit was raised to $1,25,000 last June.
In mid-January, the foreign exchange reserves touched a new life-time high at $322.135 billion driven by higher foreign fund inflow and lower forex outgo as global crude oil prices came down sharply. Gold imports have also come down in recent months due to curbs.
Foreign funds have been pumping more dollars into equities and bonds ever since the new government assumed charge in May.
Foreign institutional investors have invested $16.15 billion in equities and another $62.5 billion in government securities and corporate bonds in 2014.
Meanwhile, the RBI maintained status quo on rates as expected disappointing India Inc. Governor Raghuram Rajan said that there is no case for a reduction now hoping banks will pass on the benefit to consumers from the last rate cut. There was some consolation for industry as the statutory liquidity ratio-which determines the amount of funds that banks must set aside with the RBI-was reduced by 0.5 per cent to 21.5 per cent of their total deposits. The move could infuse Rs 45,000 crore liquidity into the system.
Despite a generalized fall in cost of funds, banks are yet to pass benefits to consumers, Rajan said. “Many have been relatively quick to cut the deposit rates but not so quick to cut the lending rates… I think it is the pressure of the competition which will eventually force them to pass through these cuts. So, let us wait and see. It is not regulatory intervention… it is competition.”
Stating that Union finance minister Arun Jaitley has reiterated the government’s desire to stick to the budgetary target for this year, Rajan said that the RBI will be looking at the fiscal consolidation path provided in the Budget.