FPI buying of debt via voluntary retention route gathers pace

Mumbai: Overseas debt purchases via the voluntary long-term investment route have accelerated sharply, with foreign holdings so far in May marking their highest monthly level in two years and this year's commitments crossing the billion-dollar threshold in the latest demonstration of India's emergence as a global debt investment option.

FPI investment in the debt-voluntary retention route (VRR) up to May 30, 2024, was at $508 million, the highest monthly level since May 2022 when the figure was at $1.17 billion, National Securities Depository data showed.

So far in 2024, the total figures for FPI investment in the debt-VRR route stand at $1.22 billion versus a net outflow of $1.03 billion in 2023.

"The VRR, known for its stability and long-term commitments, has seen heightened activity as global funds increase their exposure to high-yield and structured credit trades. This reflects a strong confidence in India's macroeconomic fundamentals," said Deepak Sood, senior partner and head of fixed income at Alpha Alternatives.

"Typically, these trades are held until maturity, making the VRR a preferred choice over the general corporate debt quota for global funds," he said.

In a bid to encourage FPIs to carry out long-term investments in Indian debt markets, the Reserve Bank of India (RBI) had in March 2019 operationalised the VRR scheme. Foreign investors participating in the VRR route were given greater operational flexibility when it came to the choice of instruments as well as exemptions from certain macro-prudential and regulatory requirements.

Under the scheme, the minimum retention period for FPIs investing in debt instruments is set at three years while overseas players must maintain at least 75% of the allocated amount in India. In February 2022, the RBI increased the investment limit under the VRR scheme to ₹2.5 lakh crore from ₹1.5 lakh crore earlier.

Market players said that the uptick in FPI investment in this category over the past month had been driven by structured credit deals such as a recent bond deal featuring Vedanta.

Bloomberg had reported last month that Vedanta had mandated JP Morgan Chase & Co to raise ₹2,500 crore through rupee-denominated bonds.

"The Vedanta deal as well as others such as Nirma's acquisition financing deal for a debt fund-raising exercise of over ₹3,500 crore have contributed to the rise in FPI investment in the debt-VRR segment as interest in relatively high-yielding instruments is strong," a treasury executive at a bank said.

With government securities also being a part of the permitted instruments under the debt-VRR route, market players see activity potentially picking up further as Indian sovereign debt gets included in a JP Morgan index from next month.

"My sense is that if the VRR is available, a couple of specialists will put in money through the VRR route so that they get flexibility because the yield curve right now is inverted. People are bullish about duration; the inversion of the curve clearly tells you that in the longer-term rates are bound to come down," said Ajay Manglunia, MD & head, Investment Grade Group, JM Financial.