RBI’s voluntary retention route move removes parallel limits for FPIs

The Reserve Financial institution of India (RBI) has streamlined the Voluntary Retention Route (VRR) framework by successfully merging it with the overall route for overseas portfolio traders (FPIs). The move eases exit constraints, migrates current VRR investments right into a unified framework from April 1, and removes the parallel funding restrict, market individuals stated.

On Friday, the RBI eliminated the ₹2.5 trillion funding cap beneath VRR for FPIs. Overseas traders had utilised over 80 per cent of this restrict, highlighting sturdy demand for long-term publicity to India’s debt market.

Venkatakrishnan Srinivasan, founder and managing accomplice of Rockfort Fincap LLP, stated the separate VRR funding restrict has been eliminated, and all overseas investments made earlier beneath the route (throughout authorities bonds, treasury payments, state improvement loans, and company bonds) will now be counted beneath the conventional basic route limits. This creates a typical funding framework as an alternative of parallel routes.

“Secondly, whereas the minimal retention requirement continues, traders are now not compelled to remain invested for longer intervals if they’d voluntarily opted for prolonged lock-ins. They will now exit totally or partly after finishing the minimal holding interval,” Srinivasan stated.

Launched in 2019 to draw secure abroad capital, the VRR provides larger operational flexibility and aid from sure regulatory norms to traders in the event that they decide to retaining a portion of their investments in India for a specified interval.

“Eradicating the VRR cap ought to make Indian debt extra interesting for long-term traders and, on the identical time, assist clean volatility coming from short-term flows,” stated the treasury head of a personal financial institution.

Presently, the VRR route is obtainable to FPIs with sure restrictions, together with a minimal funding retention interval of three years. There are additionally funding caps of ₹40,000 crore for authorities securities and ₹35,000 crore for company debt, inside an total restrict of ₹2.5 trillion, together with a compulsory retention of 75 per cent of the dedicated portfolio dimension. Underneath the revised framework, FPIs are being provided a extra versatile route, with the general ₹2.5 trillion cap beneath the VRR eliminated, whereas category-wise limits are retained.

“Whereas India’s progress story stays intact, present circumstances should not significantly engaging, and it might take time for overseas capital to reply, even with relaxations such because the removing of caps,” stated Vinay Pai, head of fastened earnings at Equirus Capital.

Knowledge from the Nationwide Securities Depository confirmed that out of the ₹2.5 trillion VRR restrict, ₹2.04 trillion had been allotted to traders as of February 5.

“All current VRR investments can be easily transferred to the overall route from April 1, with none want for unwinding or contemporary approvals. Total, the move simplifies the funding framework, reduces compliance complexity, and alerts the RBI’s confidence within the maturity of India’s bond market,” Srinivasan stated.

The central financial institution stated the relief is a part of a broader push to deepen monetary markets, alongside proposed frameworks for derivatives on company bond indices and whole return swaps on company bonds. These measures are anticipated to enhance threat administration and encourage larger participation throughout the yield curve.