Does it make sense for individuals to invest abroad? As long as the Indian markets are doing better than foreign ones and the rupee is strong, no one is interested
30-Apr-2007 •Dhirendra Kumar
How times change. Most of us who are above the age of thirty remember a time when foreign exchange was one of the most precious substances known to the inhabitants of India. Wasting foreign exchange was a heinous sin and in any case most of us never had the stuff, so had no chance of wasting it. When Indians travelled abroad, the government doled out a quantity of dollars that was about enough to stave off actual starvation provided the traveller managed to save money on laundry by either washing clothes or by wearing unwashed clothes. What almost everywho had to travel did was to buy dollars on the black market and smuggle them abroad hidden in one's socks or something.
Obviously, dire consequences awaited those who were caught smuggling dollars.
All of which makes it somewhat amusing that for some years now, not only has the Government of India permitted individual Indians to invest money abroad, it is now actually exhorting Indians to invest abroad but hardly any one is interested. We were first permitted to invest abroad in the 2003 budget. The investments could only be through mutual funds which could only invest abroad in foreign companies which owned a stake in a joint venture that was listed in India. I assume this complicated condition was a nod to the old days and was meant to ensure that Indians invested only in those companies which had invested in India. And there was an upper limit of US$ 50 million to the total amount that could be invested abroad through this route. The government had opened the floodgates but nothing flowed through them. Since then, this limit has been raised from to US$ 4 billion now but the actual quantum of investments has stayed far below the limit.
With foreign exchange piling up in the RBI's coffers, the rupee is strengthening against the dollars and the government would be happy to see people sell rupees, buy foreign currencies and invest outside India. But with the rest of the world queueing up to invest in India (FII investments over the last three years total over US$ 25 billion), foreign investing has proved to be a hard sell. The handful of mutual funds that offer the foreign option have had only a very small amount of money being invested in them. And, as it turns out, with very good reason. Shopping for investments abroad is not quite as simple as other kinds of shopping. Firstly, with the Indian stock markets doing so much better than most other markets, there's nothing to attract investors abroad. And over the year past, it has become clear even to individual investors that the foreign exchange risk can be considerable. The US dollar has now declined by almost 10 per cent since it peaked on November 15, 2006.
While the long-predicted decline of the dollar is no surprise at all to anyone who tracks the global financial markets, it has brought home the reality of investing abroad very vividly. Does it make sense for individuals to invest abroad? In theory, it does. It adds a new kind diversification to your portfolio that would be very useful when the situation changes. However, I can't help thinking that the overall limit on investing abroad makes this an all-or-nothing situation. As long as the Indian markets are doing better than foreign ones and the rupee is strong, no one is interested. However, if both these things were to be reversed it is possible that the three billion dollar limit will be reached in no time at all and units of mutual funds that are invested abroad will become as sought after imported stuff used to be in the times gone by.