Why FPIs may find debt market more attractive after easing of norms by RBI

The Indian debt market could attract higher interest from foreign portfolio investors (FPIs), with the Reserve Bank of India (RBI) on Friday easing investment norms through the voluntary retention route (VRR), rolled out since March 2019.

The RBI waived off the requirement for FPIs to invest a minimum 25% of the committed portfolio size (CPS) within one month of allotment. It introduced an additional category, VRR combined, which allows investors to invest in both corporate and sovereign bonds. “The VRR route has collected close to `11,000 crore of the corporate bond limit till April, 2019,” said Dhawal Dalal, CIO, fixed-income, Edelweiss Asset Management.

Investments through the VRR-combined route are capped at Rs 54,606.55 crore, while the VRR-corporate and the VRR-government are capped at Rs35,000 crore and Rs 40,000 crore, respectively. Foreign portfolio investors (FPIs) have pulled out nearly $230 million worth of bonds in May so far on the back of an outflow of $1.5 billion in April. Dealers believe with the sovereign bond yield being the lowest in the past one year and the rupee strengthening, emerging markets like India might see bigger inflows.

The scheme which was proposed on October 5, 2018, has a minimum retention period of three years where investors need to maintain a minimum of 75% of their investments in India. FPIs registered with Sebi are eligible to voluntarily invest through the route in government and corporate bonds.

At completion of the minimum retention period of three years, the FPI can opt for continuing investing until the date of maturity or till the date of sale, whichever is earlier.“Investments made through the route shall not be subject to any minimum residual maturity requirement, concentration limit or single/group investor-wise limits applicable to corporate bonds”, the RBI said in a notification.