RBI monetary policy: Increase in VRR limit to boost debt capital

The Reserve Bank of India’s (RBI’s) decision to raise limits under the Voluntary Retention Route (VRR) will provide additional sources of capital for the domestic debt market, according to market players.

The limit enhancement from the existing Rs 1.5 trillion to Rs 2.5 trillion comes at a time when interest rates in markets such as the US are set to go up, raising the spectre of flight of foreign capital from India. The money coming in through the VRR route may be more stable as it comes with a lock-in of three years.

“The proposed increase in VRR limits can help in partly bridging the net borrowing plan for the next fiscal, which is over Rs 11 trillion, with FPI capital. We certainly need FPIs to take up government bonds in addition to the traditional domestic players,” said Sriram Krishnan, managing director and co-head, Global Transaction Banking, Deutsche Bank India.

According to analysts, VRR and VRRR (variable rate reverse repo) will become the primary liquidity management tools in an attempt to enhance the flexibility of monetary action by the RBI.

“RBI’s decision to increase the VRR limit is a welcome step and a long-pending one. This will allow foreign investors to do bespoke deals on the debt side with Indian issuers, without having to worry about concentration limits, exposure limits and residual maturity,” said Anand Singh, co-founder, Wilson Financial Services.

VRR represents appetite for “long-term” rupee credit by FPIs and was introduced by the RBI on March 1, 2019. The original allotment amount was Rs 75,000 crore, which was subsequently increased to Rs 1.5 trillion last year under the “VRR Combined” category and was made available on tap. At the time of the increase in original limit from Rs 75,000 crore, there was some unutilised portion. This along with the fresh limit worked out to Rs 90,630 crore. Accordingly, the total fresh allotment made last year was for Rs 90,630 crore, which stands almost fully utilised.

Experts believe there is a pent up demand of Rs 30,000-40,000 crore for this route, which has become popular for investment in corporate bonds and structured private equity deals.

The VRR route has gained popularity as it allows FPIs to participate in a deal without having to find another foreign investor. The route can be used for investment in corporate bonds as well as government securities.