RBI Expands Debt Investment Limits Under ‘Voluntary Retention Route’

The RBI raised the investment limit via voluntary retention route to Rs 1.5 lakh crore from Rs 54,606 crore.

A U.S. one-hundred dollar banknote and Indian 10 rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

The Reserve Bank of India reopened a window of foreign investment in local debt via the “voluntary retention route”, which allows investors easier rules in return for a commitment to remain invested for a longer period.

The central bank raised the limit for investments via this route from current Rs 54,606 crore to Rs 1.5 lakh crore, according to its press release.

The statement issued by the RBI also said:

  • The investment limit available for fresh allotment, after adjusting for existing investments, shall be Rs 90,630 crore.
  • The minimum retention period shall be three years.
  • Investment limits shall be available “on tap” and allotted on “first come, first serve” basis.

In March 2019, the RBI had decided to open a new window for foreign investors in government and corporate debt to draw in longer-term funds. Termed as the voluntary retention route, this was first suggested in October 2018 against the backdrop of a weakening Indian rupee. The scheme was aimed at drawing in foreign investors who are willing to commit to keeping money in India for a minimum period of time. In return, they will get more operational freedom than regular foreign debt investors.

The route has seen considerable success, particularly in the corporate debt segment. Data available on the website of Clearing Corporation of India Ltd. showed that Rs 41,583 crore have come in via this route. Of this, Rs 2,890 crore has come into government bonds.

Rule Changes

Along with increasing the limit, the RBI also notified certain rule changes for investments using this route. One key change is the extent of short-term securities that FPIs can hold.

  • Short-term investments by an FPI into government securities and treasury bills can now be up to 30 percent of the total investment of an FPI compared to 20 percent earlier.
  • Similarly, the short-term investment limit by an FPI into corporate bonds has been raised to 30 percent of the investor’s total investment.
  • FPI investments in debt instruments issued by asset reconstruction companies are exempt from the short-term limits.
  • FPI investments in debt instruments issued by an entity under the Corporate Insolvency Resolution Process are also exempt from short-term limits.
FPIs have also been allowed to invest in exchange traded funds that invest only in debt instruments, a move that will help the recently launched Bharat Bond ETF.
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