'Why should RBI own dollars…': Capitalmind's Deepak Shenoy challenges central bank's curbs on mutual funds

Deepak Shenoy, founder of Capitalmind, has challenged the Reserve Bank of India’s (RBI) long-standing restrictions on Indian mutual funds investing in foreign stocks, questioning why individuals enjoy far greater flexibility than institutions. Shenoy’s remarks, shared on social media, have reignited the debate over outdated investment caps and the need for a more modern approach to managing India’s forex reserves and global exposure.

“Why do we still have restrictions on Indian mutual funds investing in foreign stocks, when we can do the same thing as individuals (with a $250K limit per person per year)?” Shenoy wrote. “RBI has a $7 billion limit that hasn’t changed since 2009. Instead of RBI reserves, let’s own stocks!”

Shenoy argued that these restrictions limit India’s financial ecosystem, suggesting that Indian investors and institutions should have more freedom to control foreign assets. “If I own gold, it means India owns gold. Similarly, my ownership of U.S. stocks via an Indian mutual fund should be considered an Indian asset,” he stated.

He also pointed out the disparity in policy: “Why should RBI own the dollars? Why can’t people own dollars? Instead of an $7 billion limit, make it $50 billion. The more foreign assets we control, the more flexibility we gain.”

The RBI imposes strict caps on mutual fund investments in foreign markets:

• $7 billion industry-wide cap for investments in overseas securities.
• $1 billion additional cap for overseas ETFs.

Individual mutual fund houses are limited to $1 billion for such investments.

In contrast, under the Liberalised Remittance Scheme (LRS), individuals can invest up to $250,000 annually in foreign assets.

These restrictions, unchanged since 2008, aim to maintain forex stability, mitigate risks from international market volatility, and control capital outflows. However, critics argue that India’s robust forex reserves, which reached $675 billion in August 2024, justify an overhaul. 

Mutual fund leaders echo Shenoy’s call for change. Nilesh Shah, MD of Kotak Mutual Fund, and Neil Parikh, CEO of PPFAS Mutual Fund, have highlighted the growing gap between investor demand for diversification and the limits placed on mutual funds. 

Shah noted, “With forex reserves on an upward trajectory, there’s a case for enhancing these limits.”

In November 2024, SEBI introduced a minor change, allowing mutual funds to invest in overseas funds with up to 25% exposure to Indian securities. While this adjustment provides some flexibility, Shenoy and others believe the core restrictions still need addressing.

The existing disparity hinders Indian investors’ ability to access international markets through professionally managed funds. Instead, individual investors are left to manage their own overseas portfolios, increasing their risk.