RBI relaxes capital outflows further

Takes great leap forward towards capital account convertibility.

The Reserve Bank of India (RBI) today eased overseas investment and loan repayment norms for companies, mutual funds and individuals, seeking to stem the rupee's gains by encouraging capital outflows and signalling another step towards fuller capital account convertibility.

The rupee today rose to the highest since May 1998 on speculation that the rallying stock market will attract investment from overseas. The rupee strengthened 0.1 per cent to 39.73 against the dollar.

Companies can now repay overseas loans of as much as $500 million ahead of maturity without RBI's express permission. The earlier limit was $400 million.

The ceiling on investments in overseas ventures has been raised to 400 per cent of their net worth from 300 per cent, and interestingly this allowance has also been extended for the first time to partnership firms.

Listed companies have now been allowed to make portfolio investments in any company abroad, with the removal of a stipulation that such investments could be made only in companies which have a 10 per cent reciprocal share holding in the Indian company. The limit for such portfolio investments has also been raised to 50 per cent of the net worth from 35 per cent now.

Mutual funds would now be allowed to invest overseas an aggregate of $5 billion against $4 billion hitherto and the ceiling on remittances resident individuals can make has been doubled to $200,000 from $100,000.

After the US Federal Reserve cut its key rates by 50 basis points on September 18, foreign institutional investors' (FIIs') investments in India increased with $1.54 billion of investments during September 19-21.

RBI has been intervening heavily since December 2006 to absorb foreign currency flows and, in turn, had to hike the ratio of deposits that banks have to keep with the central bank several times to suck out liquidity and prevent it from impacting inflationary expectations.

The RBI bought $21.10 billion of dollars during April-July 2007, with $11.42 billion in July alone, resulting in infusion of rupee liquidity of Rs 84,934 crore.

Union Bank of India Chairman M V Nair said the liberalisation of overseas investment norms are enabling provisions. "These will provide enough scope for companies to plan their business strategies for overseas business and growth plans. However, the impact of these changes will be seen only over a period of time. These steps also make inflows and outflows of investments much easy," he said.

The RBI, in a statement, said these liberalisation measures are acceleration of the implementation of the third phase of the recommendations of the Committee on Fuller Capital Account Convertibility (CFCAC) on foreign exchange outflows.

Nair said the use of higher pre-payment limit would depend on the interest rate differential at home and abroad, while the doubling of the existing limit under liberalised remittance scheme for individuals has marginal significance.

Investments overseas by individuals are yet to take off with returns available in Indian markets outstripping most markets.

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Opening the floodgates

Individuals can remit up to $200,000 against $100,000

Companies allowed to invest overseas up to 400% of net worth overseas against 300% till now

Partnership firms also allowed to invest overseas 400% of net worth

Ceiling on portfolio investments by companies raised to 50% of net worth from 35%

The requirement of 10% reciprocal shareholding in listed Indian companies done away with for overseas portfolio investment

Companies can prepay ECBs up to $500 million against $400 million now

Mutual funds allowed to invest an aggregate of $5 billion overseas against $4 billion now