RBI doubles debt limit for FPIs; yields may fall

Investment under voluntary retention route raised to Rs 1.5 lakh crore.

Mumbai: In a move that would increase the demand for Indian bonds and lead to a fall in yields, the Reserve Bank of India on Thursday doubled the investment limit under the voluntary retention route (VRR) for foreign portfolio investors (FPIs) to Rs 1.5 lakh crore. Dealers expect bond yields to soften on Friday.

In a statement, the central bank said, “On a review, the following changes are made to the directions governing investment through the voluntary retention route. The investment cap is increased to Rs 1,50,000 crore from Rs 75,000 crore. The FPIs that have been allotted investment limits under VRR may, at their discretion, transfer their investments made under the general investment limit to VRR. FPIs are also allowed to invest in exchange traded funds that invest only in debt instruments.”

Investments through the VRR route is free of the regulatory norms applicable to FPI investments in debt markets, provided the FPIs maintain a minimum share of their investments for three years. FPIs registered with Securities and Exchange Board of India (Sebi) are eligible to voluntarily invest through the route in government and corporate bonds.

“The move will increase the demand for bonds. This will also add glare to corporate bonds. Since FPIs have to stay invested for three years under VRR, it brings more stable money and the inflows do not cause volatility in the exchange rate,” said Ashutosh Khajuria, executive director at Federal Bank.

The RBI had introduced VRR in March 2019, to enable FPIs to invest in India’s debt markets. Broadly, investments through the route will be free of the macro-prudential and other regulatory norms applicable to FPI investments in debt markets, provided FPIs voluntarily commit to retain a required minimum percentage of their investments in India for a period. Participation through this route is entirely voluntary. As much as Rs 75,000 crore was offered for investment in two tranches so far. As on December 31, around Rs 54,300 crore has been invested under the scheme. The investment limit available for fresh allotment will accordingly be Rs 90,630 crore, and will be allotted under the VRR–combined category.

The minimum retention period, the RBI said, shall be three years. Investment limits shall be available ‘on tap’ and allotted on ‘first come, first served’ basis, and the ‘tap’ shall be kept open till the limit is fully allotted.

FPIs may apply for investment limits online to Clearing Corporation of India through their respective custodians. CCIL will separately notify the operational details of application process and allotment, the RBI said in a release.

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