The Reserve Bank of India on Friday unveiled a set of measures to deepen financial markets, including a major change to the voluntary retention route (VRR) for foreign investors. By scrapping the Rs 2.5 lakh crore cap and offering greater operational flexibility, the RBI aims to make long‑term FPI participation in India’s bond market smoother and more predictable.
“The VRR has been witnessing active investment by FPIs, and over 80% of the current investment limit of Rs 2.5 lakh crore has been utilised. With a view to ensuring predictability about the availability of investment limits under the VRR and to further increase ease of doing business, it has been decided that investments under the VRR shall now be reckoned under the limit for FPI investments under the general route,” the RBI said. It added that it will provide other operational flexibilities to FPIs, who invest under VRR.
From Artificial Caps to Predictable Participation
The RBI introduced VRR in 2019 to provide an additional channel for investments by foreign portfolio investors (FPIs) with long-term investment interest in the Indian debt markets. Under the VRR route, foreign investors have to commit to retain their investments for a minimum of three years.
“Removing the cap on the VRR makes it easier for long-term foreign investors to bring money into India’s bond market. Earlier, even willing investors could get stuck if the VRR limit was exhausted. Now that restriction is gone. Investors who are ready to stay invested for a longer period can enter smoothly, while overall safety limits on government, state and corporate bonds remain unchanged,” said Venkatkrishnan Srinivasan, founder and managing partner, Rockfort Fincap LLP.
He added that the move signals that the RBI prefers stable, long-term foreign money rather than short-term speculative flows. In the current financial year, FPIs net bought debt worth $1.9 billion compared to $16.1 billion in the previous year.
Policy Refinement
“The framework removes concerns around quota exhaustion for committed investors. The move reflects the growing appeal of Indian bonds post global index inclusions and recent FPI outflows, signalling a policy refinement to ease participation rather than a fresh demand catalyst,” said Kunal Sodhani, treasury head at Shinhan Bank. This is more of an operational easing and won’t drive immediate inflows, he added.