RBI revises VRR for investments by FPIs; Doubles investment limited in Government & Corporate binds

In a bid to attract more investment in government and corporate bonds, the Reserve Bank of India (RBI) has revised the investment cap for foreign portfolio investors (FPI) under the 'voluntary retention route' (VRR) to Rs1.50 lakh crore from Rs75,000 crores.

These limits will be available 'on tap' and allotted on 'first come, first served' basis.

Details of the revised VRR scheme that will open for allotment from January 24, 2020:

The investment limit under VRR has been increased to Rs1,50,000 crores.

The investment limit available for fresh allotment shall accordingly be Rs90,630 crores (net of extant allotments and adjustments); and shall be allotted under the VRR–Combined category.

The minimum retention period shall be three years.

Investment limits shall be available 'on tap' and allotted on 'first come, first served' basis.

The 'tap' shall be kept open until the limit is fully allotted.

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

CCIL will separately notify the operational details of the application process and allotment.

Currently, short-term investments by a foreign portfolio investors (FPI) should not exceed 20 per cent of the total investment of that FPI in either central government securities (including treasury bills) or state development loans or corporate bonds. The short-term investment limit has now been increased from 20 per cent to 30 per cent in both cases.

The RBI had introduced Voluntary Retention Route (VRR) for Investments by Foreign Portfolio Investors (FPIs) on March 01, 2019. An amount of ₹ 75, 000 crores was offered for investment in two tranches so far. As on December 31, 2019, around ₹ 54,300 crores has already been invested under the scheme. This helped FPIs to invest in debt markets in India.

Besides, the RBI has also allowed FPIs to invest in Exchange Traded Funds (ETF) that invest only in debt instruments. The government also plans to launch the second tranche of its Bharat Bond ETF having mopped up Rs 12,400 crore in December 2019 from the first tranche.

The step has been taken at a time when the Indian economy has slowed which has increased the possibilities fiscal deficit widening. This can push up the government borrowing.