RBI relaxes rules for FPI investment in corporate bonds

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Mumbai | Published: February 8, 2019 3:40:35 AM

In April 2018, the central bank had notified that no FPI shall have an exposure of more than 20% of its corporate bond portfolio to a single corporate, and in case an FPI has exposure in excess of 20%, it shall not make further investments in that corporate until this stipulation is met.

RBI, rules for FPI investment, FPI investment, corporate bonds, Quantum Mutual FundPankaj Pathak, fund manager – fixed income at Quantum Mutual Fund, pointed out that the decision is a good move as the earlier rule had hampered genuine foreign investor flows into corporate bonds. “

The Reserve Bank of India (RBI) has relaxed its rules on foreign portfolio investors’ (FPI) holding of corporate bonds, stating that it has withdrawn its regulation whereby an FPI could not have an exposure of more than 20% of its corporate bond portfolio to a single corporate, including exposure to entities related to the corporate.

In April 2018, the central bank had notified that no FPI shall have an exposure of more than 20% of its corporate bond portfolio to a single corporate, and in case an FPI has exposure in excess of 20%, it shall not make further investments in that corporate until this stipulation is met. “A newly registered FPI shall be required to adhere to this stipulation starting no later than 6 months from the commencement of its investments,” the RBI had said. Though FPIs were given exemption from this requirement on their new investments till end-March 2019 to adjust their portfolios, the RBI has found that foreign investors were constrained due to this stipulation.

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“While the provision was aimed at incentivising FPIs to maintain a portfolio of assets, further market feedback indicates that FPIs have been constrained by this stipulation. In order to encourage a wider spectrum of investors to access the Indian corporate debt market, it is now proposed to withdraw this provision,” the RBI said during Thursday’s monetary policy review. This means that even if a foreign investor wants to take concentrated positions in select bonds, they will be able to do so with the removal of the 20% limit.

Pankaj Pathak, fund manager – fixed income at Quantum Mutual Fund, pointed out that the decision is a good move as the earlier rule had hampered genuine foreign investor flows into corporate bonds. “We though do not expect large flows immediately as fiscal concerns and political uncertainty will weigh on investor sentiment,” he said.
As of now, FPIs have utilised 70.23% of their investment quota of Rs 2.89 lakh crore.

R Sivakumar, head – fixed income at Axis Mutual Fund, said the change in FPI regulation for corporate bonds is definitely a welcome step. “It will bring in a lot of foreign investors who are looking to build a part of their portfolio in India rather than build an India-dedicated fund. Those who want to buy only one or two bonds in India will be welcome,” he said.

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