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RBI wary of portfolio funds
Monica Gupta & Sidhartha in New Delhi | January 03, 2005 10:17 IST
The Reserve Bank of India has expressed reservations about the finance ministry's proposal to liberalise the investment limit for foreign institutional investors in certain sectors.
Senior finance ministry officials told Business Standard that the RBI was of the opinion that the recommendations of the committee on foreign institutional investment under Chief Economic Adviser Ashok Lahiri were "too liberal".
Another committee headed by Lahiri is now examining ways to reduce the vulnerability of the markets to FII flows. It is expected to submit its report by the January end. The government is also reviewing whether FII investment should be free-flowing in all sectors.
Also under the scanner is whether a clear distinction should be drawn between foreign direct investment and FII flows and whether FIIs make the economy vulnerable to external shocks.
The previous committee, which submitted its report in June 2004, had recommended that in general, FII investment ceilings should be reckoned over and above the sectoral FDI cap.
The government should ease the investment limits for all sectors, including, telecom, defence production, public-sector banks and insurance companies, it said.
The special procedure for raising FII investments beyond 24 per cent up to the FDI limit could be also dispensed with, the committee recommended.
For telecom, the panel proposed the foreign investment ceiling be increased to 74 per cent without separate sub-ceilings.
For insurance and defence production, the committee favoured raising the composite cap from 26 per cent to 49 per cent, without any sub-limits either.
Further, in case of public-sector banks, the committee had proposed capping FII investment at 20 per cent in addition to the 20 per cent foreign investment that are allowed at present.In his Budget speech, Finance Minister P Chidambaram had said that he proposed to implement the recommendations of the committee in consultation with the ministries concerned.