RBI increases FPI limit in debt market to Rs 2.5 lakh crore

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The Reserve Bank of India (RBI) on February 10, 2022, said that it has increased the limit for foreign portfolio investors (FPIs) to invest in the local debt market from Rs 1 lakh crore to Rs 2.5 lakh crore under the Voluntary Retention Route (VRR) with effect from April 1.

According to RBI Governor Shaktikanta Das, VRR will be revised on April 1 to provide a separate channel, free from macroprudential controls, for FPI investment in government and corporate debt securities.

What is VRR?

The Reserve Bank of India (RBI) introduced the Voluntary Retention Route (VRR) to assist Foreign Portfolio Investors (FPIs) in investing in India’s debt markets. These investments are exempted from macro-prudential and other regulatory prescriptions that apply to FPI investments in debt markets. FPIs will have to commit to maintaining a minimum percentage of their investments in India for the period of their choice.

Benefit for corporates looking for debt funding

FPI investment under the VRR scheme will help FPIs to invest in a high yield segment with corporate debt and GSecs. This will benefit corporates looking for debt funding and will be beneficial on margin for long term investment/capacity expansion.

Increased VRR limit will attract additional funds

The enhancement of VRR limits for investments by foreign portfolio investors by Rs 1 lakh crore to Rs 2.5 lakh crore is a positive move, as the existing VRR limits are almost exhausted, even as the overall FPI investment in government securities and corporate bonds have been on a declining trend over the past few years. This increase in the limit will attract additional funds amid an increase in planned government borrowings.

High operational flexibility

A further boost in the limits in VRR can help prevent sudden shocks in the form of significant outflows as it provides higher operational flexibility against the commitment of a minimum holding period and is seen as mitigating the risk of rupee volatility.

Governor Shaktikanta Das on Thursday also announced India’s economic growth rate to be 7.8% for the financial year 2022-23.