RBI removes investment cap under voluntary retention route for FPIs

The RBI has removed the Rs 2.5-trillion investment cap under the voluntary retention route for FPIs to deepen bond markets, enhance capital flow stability and encourage long-term foreign participation

The Reserve Bank of India (RBI) on Friday announced the removal of the ₹2.5 trillion investment cap under the voluntary retention route (VRR) for foreign portfolio investors (FPIs), a move aimed to deepen domestic bond markets and improve capital flow stability.

 

Under the revised framework, investments made through VRR will be governed only by the existing investment ceilings applicable to each category of securities under the general route, effectively giving foreign investors greater flexibility in deploying long-term funds into Indian debt markets.

 

The move comes at a time when policymakers are seeking to shore up FPI participation in the bond market amid intermittent outflows, tight global financial conditions and elevated government borrowing.

 

The central bank said the relaxation was part of a wider push to deepen financial markets, alongside proposed frameworks for derivatives on corporate bond indices and total return swaps on corporate bonds. These measures are expected to enhance risk management options and encourage greater participation across the yield curve.

 

Umesh Revankar, executive vice chairman of Shriram Finance, said the combination of regulatory easing and market development initiatives could have a tangible impact on credit transmission.

 

“Measures to deepen financial markets, including the proposed framework for derivatives on corporate bond indices and total return swaps on corporate bonds, as well as refinements to VRR for foreign portfolio investors will, over time, support more efficient pricing and diversification of funding sources,” he said.

 

“For lenders that operate closer to the ground, this combination of macro stability, regulatory streamlining, and market development can help translate system-wide liquidity into more reliable, appropriately priced credit for MSMEs, transporters and self-employed borrowers,” Revankar added.

 

Market participants said the removal of the VRR cap could improve the attractiveness of Indian debt for long-term foreign investors, especially insurance and pension funds, while also reducing volatility associated with short-term flows.

 

Separately, the central bank released a draft regulatory framework to enable the introduction of derivatives on credit indices and total return swaps on corporate bonds. This paves the way for derivatives on credit indices and total return swaps on corporate bonds, and invited public comments on the proposals by February 27. The draft includes consolidated provisions for all credit derivatives, including existing directions for credit default swaps.

 

Earlier this week, the Union Budget for 2026-27 outlined a series of measures to deepen the corporate bond market, proposing the introduction of total return swaps on corporate bonds and incentives for municipalities to facilitate fundraising.