India has allowed government-run companies to invest up to 30 percent of their surplus cash in select mutual funds, a move that could boost incomes at these companies and fuel demand for stocks.
The investment will be limited to mutual funds operated by state-owned firms such as the Life Insurance Corp of India and the State Bank of India, Cabinet spokesman Priyaranjan Dasmunsi told reporters on Thursday.
State-run companies in India are estimated to hold surplus cash reserves totaling more than 2 trillion rupees (US$50 billion), which is currently invested in low-interest bank deposits.
The Cabinet's decision will help them earn better returns on surplus funds. It could also cushion against any sudden or large withdrawal by foreign investors from the stock market.
For instance, the hugely profitable Oil and Natural Gas Corp, India's top petroleum exploration company, will be able to invest up to 177 billion rupees in the stock market this year.
"The move is a major booster for the equity market," said R.K. Gupta, chief executive of Taurus Mutual Fund.
The mutual fund industry was disappointed with the government for restricting the investments to funds operated by state-owned firms.
"It's a good move ... but we didn't expect this discrimination ... as all mutual funds are under the same regulations,'' said A. P. Kurien, chairman of the Association of Mutual Funds of India.
India's stock market has risen about 48 percent over the last year, driven by foreign fund investment of more than US$10 billion this year. However, it was down sharply yesterday in the wake of an overnight plunge in the US market.
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