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Since 1st March, 1999
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Go-abroad step to halt rupee rise

Mumbai, Sept. 25: Find that villa in Greece or the Google stock expensive' Donít worry.

The Reserve Bank of India (RBI) today doubled the limits for resident Indians planning to make investments abroad. Individuals can now invest up to $200,000 abroad in a single financial year. The earlier ceiling was $100,000.

The relaxation was one of five steps announced by the central bank today.

In a move that has been ostensibly taken to encourage fund outflows from the economy and thereby check the rupee's rise, the RBI also announced significant relaxations for the corporate sector.

Companies have now been allowed to invest up to 400 per cent of their net worth in either overseas joint ventures or wholly owned subsidiaries without having to seek prior permission from the central bank.

Companies listed on Indian stock markets can make portfolio investments abroad up to 50 per cent of their net worth. The earlier limit was 35 per cent.

The RBI also scrapped a restrictive condition for portfolio investments under which overseas firms had to have a 10 per cent reciprocal shareholding in the Indian entity.

The reciprocal shareholding rule has stifled opportunities for Indian companies.

For instance, a company could not pick up shares in Yahoo Inc unless the famed search engine company had a 10 per cent holding in the Indian firm.

Further, the existing limit for pre-payment of external commercial borrowings (ECBs) without the central bank approval has been increased from $400 million to $500 million.

This is, however, subject to compliance with the minimum average maturity period as applicable to the loan.

The cap on aggregate overseas investments by mutual funds that are registered with the Securities and Exchange Board of India (Sebi) was also raised from $4 billion to $5 billion.

The RBI added that the existing facility of investing up to $1 billion in overseas exchange traded funds would continue. At present, this facility is granted to a limited number of qualified Indian mutual funds.

The RBI said the relaxations had been made to accelerate the implementation of the third phase of the recommendations of the committee on fuller capital account convertibility.

The central bank has been gradually relaxing foreign investment rules.

At one point, individuals could only invest $25,000 abroad under the liberalised remittance scheme.

The ceiling was first raised to $50,000 in December 2006 and then to $100,000 in May.

The central bank has also periodically raised the investment limits for India Inc.

Forex experts said the RBIís move had been prompted by huge dollar flows into the country, particularly from foreign institutional investors.

These investors have alone invested over $1.5 billion in stock markets over the past four trading sessions, sending the rupee to a nine-year high yesterday.

Although the surging rupee has blunted the countryís export competitiveness, the central bank has not been able to intervene aggressively by buying dollars as it floods the financial system with rupees, which could stoke inflation that has settled at 3.32 per cent.

During the week ended September 14, foreign exchange reserves rose $1.8 billion to over $232 billion on account of FII investment.

The RBIís move comes only a month after the government imposed restrictions on funds that can be raised by corporate houses through ECBs.

However, some mutual fund observers were not really elated by the RBIís action.

The mutual funds have so far invested only $600 million abroad, said Dhirendra Kumar, CEO of Value Research Online.

ďThe increase in the overseas investment cap for mutual funds can only be considered as a pre-emptive effort by the RBI. When Sebi raised the overseas investment limit to $4 billion, the dollar was hovering around Rs 45.

Today, when the dollar has depreciated to Rs 40, the increase in the overseas investment cap would not make much of a difference. So, we see this as a move to adjust the exchange rate of the rupee against the dollar.Ē

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