RBI scraps VRR limit and reforms FPI debt limits to boost bond inflows

The Reserve Bank of India (RBI) has lifted the long-term investment limit of Rs 2.5 lakh crore under the Voluntary Retention Route (VRR) to deepen the debt market by providing more flexibility to foreign portfolio investors (FPIs). Yet, overall investment limits remain in place, ensuring adequate regulatory controls on foreign ownership of Indian debt. The central bank said investments under VRR will now be counted under the overall limit for FPI investments. The measure, which will come into effect from April, is aimed at improving operational flexibility for FPIs and increasing ease of doing business.

All existing investments under VRR on April 1 will be transferred to the respective investment limits under the general route.With the VRR falling below the investment limit for FPI investments under the general route, experts expect higher investment flows, albeit slowly.

“Now that the cap has been lifted, sentiments will improve, but we cannot expect this update to increase inflows immediately. There is no cap on quantum now, but there is a cap on holding period,” Karur Vysya Bank, Finance Department Head VRC Reddy, told ET.

Overall, FPI investment in government bonds is limited to 6% of outstanding shares, while the limit for investments in corporate bonds is set at 15%. The ceiling for FPI investments in State Development Loans (SDL) has been set at 2%.

The RBI had introduced VRR in March 2019 to provide an additional channel for investments by FPIs with long-term investment interests in the Indian debt markets. FPI investments through VRR had a minimum tenure of three years, while the RBI said more than 80% of the limit has already been utilized.

“Foreign investors who are willing to invest their money in India for a longer period will no longer be blocked just because the VRR limit is full,” said Venkatakrishnan Srinivasan, managing partner of Rockfort Fincap, a debt advisory firm.

“At the same time, such investments will still have to remain within the overall limits already set for government bonds, sovereign bonds and corporate bonds. Simply put, the RBI wants to encourage stable foreign money over the long term without compromising on basic regulatory controls,” he said.

The RBI said FPIs using retention periods longer than three years may liquidate all or part of their portfolio.