Rajan panel asks govt to allow PF, insurance cos to invest overseas

The Committee on Financial Sector Reforms set up by the Planning Commission has asked the government...

The Committee on Financial Sector Reforms (CFSR) set up by the Planning Commission has asked the government to allow provident fund (PF) and insurance companies to invest in the overseas markets to mitigate their risks in the high volatile Indian markets. The government’s attempt to allow provident funds to invest in the domestic equity market has not fructified so far due to strong opposition from a section of the political class and trade unions.

“We should encourage greater outward investment by provident funds and insurance companies when inflows are high. Such diversification will make these funds more stable (give them less exposure to high volatility India markets),” said the draft report of the the high-level committee, headed by former International Monetary Fund (IMF) chief economist Raghuram G Rajan.

With the country’s foreign exchange reserves crossing the $300 billion mark and rupee appreciation against the dollar by over 10 per cent over the past one year, the Reserve Bank of India (RBI) is under pressure to liberalise the outflow of capital. The Plan panel said the relevant constituencies need to be persuaded that by restricting their investment options to domestic government securities, they are greatly limiting future returns and possibly increasing risk. “At the very least, a first step will be to diversify across foreign government securities, so that we offset foreign inflows into our government debt markets with outflow into foreign government debt markets, without these flow being driven by the RBI,” it suggested. Besides, the report said, an Indian institutional investor should have the flexibility to buy an Infosys ADR in the US or to buy shares of Infosys in India or even IBM in the US. “They should have the flexibility to buy bonds issued by governments all over the world,” it said.

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This would expose institutional investors and their customers to international practices and ideas and increase the competition faced by Indian financial markets. It would also set the stage for Indian institutional investors to sell financial products overseas, the committee said.

While individuals in India are allowed to invest $2 lakh overseas per year, this is operationally difficult due to the restrictions that inhibit domestic and foreign financial firms from selling international financial products. These relaxations could help the country by allowing outflows that keep the exchange rate from appreciating, the report concluded.