The reserve bank of India (RBI) may direct banks to restrict their exposure in mutual funds and also prescribe norms for such investments. By doing this, the regulator aims at tightening exposure and deploying funds indirectly in sectors or companies to which banks cannot lend directly due to exposure limits.

In the quarterly monetary policy review in October, RBI governor, D Subbarao cautioned banks against excessive exposure to mutual funds. He suggested them to limit this exposure.

Following this some banks have set internal limits on such investments and mutual fund managers say that this is being reflected in incremental flows.

Banks' investments with Mutual Funds increased Rs 4,173 crore to Rs 1,64,656 crore during the fortnight ended November 20.

Though RBI is not opposed to banks' parking funds with asset management companies, it is worried about the circular movement of funds from banks to mutual funds and back to banks.

Subbarao had earlier left the decision of restricting exposure in mutual funds to Indian Banks' Association (IBA), which had asked the banks to place it before their boards.

K Ramanathan, chief information officer at ING Investment Management says that while there has been no outflow from mutual funds after the RBI's comments, any official direction from the banking regulator will reduce the incremental inflows.