RBI doubles FPIs’ debt investment limit

Mumbai | Updated on January 23, 2020

Foreign portfolio investors allowed to invest ₹1.5-lakh cr under ‘voluntary retention route’

In a bid to attract more investment in government and corporate debt, the Reserve Bank of India (RBI), in consultation with the Centre, has doubled the investment cap for foreign portfolio investors (FPI) under the ‘voluntary retention route’ (VRR) to ₹1.5-lakh crore. These limits will be available ‘on tap’ and allotted on ‘first come, first served’ basis.

ETFs also opened

The new VRR scheme also allows FPIs to invest in Exchange Traded Funds (ETFs) that invest only in debt instruments. So far, they could invest only in government and corporate debt. The minimum retention period for these investments is three years.

This move comes at a time when the economy has slowed with increasing possibility of the fiscal deficit widening; this, in turn, can push up government borrowing.

The RBI said the investment limit available under the revised VRR scheme, which will be open for allotment from Friday, will be ₹90,630 crore (net of existing allotments and adjustments); and will be allotted under the VRR–Combined (government and corporate debt) category. The ‘tap’ will be kept open till the limit is fully allotted.

An amount of ₹75,000 crore has been offered for investment in two tranches so far under the VRR scheme. As on December 31, 2019, around ₹54,300 crore had already been invested under the scheme.

Inflation, deficit worries

According to Marzban Irani, Chief Investment Officer (Fixed Income), LIC Mutual Fund, raising the investment limit to ₹1.5-lakh crore will ensure that investors remain invested for at least three years.

However, it remains to be seen if the FPIs will invest in the backdrop of the higher headline CPI (consumer price index) based inflation and high (fiscal) deficit, he added.

The VRR was introduced in March 2019 to enable FPIs invest in debt.

Broadly, investments through the route are free of the macro-prudential and other regulatory norms applicable to FPI investments in debt, provided FPIs voluntarily commit to retain a required minimum percentage of their investments in India for a certain period.

For operational flexibility

The central bank underscored that it has made certain amendments to the VRR scheme to increase its operational flexibility based on the feedback received, and in consultation with the government.

Under the revised VRR scheme, the FPIs that have been allotted investment limits under the VRR may, at their discretion, transfer their investments made under the General Investment Limit to the VRR.

The RBI said the FPIs may apply for the investment limits online to Clearing Corporation of India Ltd. (CCIL) through their respective custodians.

Published on January 23, 2020

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