Monetary policy review: RBI relaxes norms for FPI investment

RBI allows foreign portfolio investors (FPI) to take exposures of more than 20% in a corporate entity

The Reserve Bank of India (RBI), in its sixth bi-monthly monetary policy review, initiated a string of measures for the bond and currency markets. 

Among them is allowing foreign portfolio investors (FPI) to take exposures of more than 20 per cent in a corporate entity. 

The central bank had limited such an exposure to only 20 per cent of the portfolio. The curbs were put in April 2018, leading to protests from the FPIs. 

Moreover, the rules also restricted financing for some sectors, such as real estate, that face difficulties in getting loans from banks. 

With the restrictions lifted now, real estate and unrated companies can heave a sigh of relief. 

Also, FPIs interested in such deals will be putting their money back in India again. With unrated firms, or firms below investment grade, it is a common practice to enter into bilateral agreements or pacts with only a few FPIs for such deals. The investors had repeatedly requested the RBI to lift such restrictions, FPI officials said.

The RBI said easing the norms would “encourage a wider spectrum of investors to access the Indian corporate debt market.” A circular on this will be issued by mid-February, the RBI added.

Another interesting announcement by the central bank was to set up a task force on ‘offshore rupee markets’. The task force would examine “issues relating to the offshore rupee markets in depth and recommend appropriate policy measures that also factor in the requirement of ensuring the stability of the external value of the rupee”.

Details about this are not known, but the announcement has resulted in interest among currency dealers. 

When the rupee is not trading much overseas, it does influence the local exchange rates. Offshore derivatives set the tone for the market opening domestically, and foreign banks are key players in this market. 

The RBI also said it will rationalise interest rate derivative regulations to achieve consistency and ease of access. This will pave the way for fostering a thriving environment for the management of interest rate risk in the economy. 

The apex bank had separate regulations on various interest rate derivative products such as interest rate swap, forward rate agreement, interest rate futures, interest rate option and money market futures. However, except for overnight indexed swaps, the activity in these derivative markets has been rather thin and limited, the RBI noted. This has limited use for interest rate derivatives in the financial sector.