RBI removes VRR cap, reshapes FPI debt limits to boost bond inflows

The Reserve Bank of India (RBI) has removed the Rs 2.5 lakh crore long term investment limit under the Voluntary Retention Route (VRR) to deepen the debt market by providing more flexibility to foreign portfolio investors (FPIs). Still, overall investment limits remain in place, ensuring sufficient regulatory controls over overseas ownership of Indian debt.

The central bank said that investments under VRR will now be reckoned under the overall limit for FPI investments. The move, which will come into effect from April, is aimed at improving operational flexibility for FPIs and enhancing the ease of doing business.

All existing investments under VRR on April 1 shall be transferred to the respective investment limits under the general route.


With the VRR being subsumed under the investment limit for FPI investments within the general route, experts expect higher investment flows, albeit slowly.

"Now that the limit is removed, sentimentally things will improve, but we cannot expect this update to increase inflows immediately. There is no limit on quantum now, but there is a limit on the retention period," Karur Vysya Bank head of treasury VRC Reddy told ET.

Overall, FPI investment in government bonds is capped at 6% of the outstanding stock, while the cap for investment in corporate bonds is pegged at 15%. The cap on FPI investment in state development loans (SDL) is fixed at 2%.

The RBI had introduced VRR in March 2019 to provide an additional channel for investments by FPIs with long-term investment interest in the Indian debt markets.

FPI investment via VRR came for a minimum of three years, while the RBI said that more than 80% of the limit has already been utilised.

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

"At the same time, such investments will still have to stay within the overall limits already fixed for government bonds, state government bonds and corporate bonds. Simply put, the RBI wants to encourage steady, long-term foreign money without compromising on basic regulatory controls," he said.

The RBI said FPIs that have availed retention periods longer than three years can liquidate their portfolio, fully or partly.