RBI's voluntary retention route move removes parallel limits for FPIs

The RBI has removed the Rs 2.5 trillion cap under the Voluntary Retention Route and merged it with the General Route, easing exit constraints and simplifying compliance for foreign bond investors

The Reserve Bank of India (RBI) has streamlined the Voluntary Retention Route (VRR) framework by effectively merging it with the general route for foreign portfolio investors (FPIs). The move eases exit constraints, migrates existing VRR investments into a unified framework from April 1, and removes the parallel investment limit, market participants said.

 

On Friday, the RBI removed the ₹2.5 trillion investment cap under VRR for FPIs. Foreign investors had utilised over 80 per cent of this limit, highlighting strong demand for long-term exposure to India’s debt market.

 

Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP, said the separate VRR investment limit has been removed, and all foreign investments made earlier under the route (across government bonds, treasury bills, state development loans, and corporate bonds) will now be counted under the normal general route limits. This creates a common investment framework instead of parallel routes.

 

“Secondly, while the minimum retention requirement continues, investors are no longer compelled to stay invested for longer periods if they had voluntarily opted for extended lock-ins. They can now exit fully or partly after completing the minimum holding period,” Srinivasan said.

 

Introduced in 2019 to attract stable overseas capital, the VRR offers greater operational flexibility and relief from certain regulatory norms to investors if they commit to retaining a portion of their investments in India for a specified period.

 

“Removing the VRR cap should make Indian debt more appealing for long-term investors and, at the same time, help smooth volatility coming from short-term flows,” said the treasury head of a private bank.

 

Currently, the VRR route is available to FPIs with certain restrictions, including a minimum investment retention period of three years. There are also investment caps of ₹40,000 crore for government securities and ₹35,000 crore for corporate debt, within an overall limit of ₹2.5 trillion, along with a mandatory retention of 75 per cent of the committed portfolio size. Under the revised framework, FPIs are being offered a more flexible route, with the overall ₹2.5 trillion cap under the VRR removed, while category-wise limits are retained.

 

“While India’s growth story remains intact, current conditions are not particularly attractive, and it may take time for foreign capital to respond, even with relaxations such as the removal of caps,” said Vinay Pai, head of fixed income at Equirus Capital.

 

Data from the National Securities Depository showed that out of the ₹2.5 trillion VRR limit, ₹2.04 trillion had been allotted to investors as of February 5.

 

“All existing VRR investments will be smoothly transferred to the general route from April 1, without any need for unwinding or fresh approvals. Overall, the move simplifies the investment framework, reduces compliance complexity, and signals the RBI’s confidence in the maturity of India’s bond market,” Srinivasan said.

 

The central bank said the relaxation is part of a broader 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 improve risk management and encourage greater participation across the yield curve.

 

A report by State Bank of India stated that the introduction of derivatives on credit indices and total return swaps on corporate bonds would provide another channel for capital flows into corporate bonds. “Investments under the VRR will now be reckoned under the FPI investment limits of the General Route, thereby enhancing liquidity in the bond segment,” the report added. 

New playbook

• Move eases exit constraints, migrates existing VRR investments into a unified framework from April 1
• It also removes the parallel investment limit
• Currently, the VRR route is available to FPIs with certain curbs, including a minimum investment retention period of 3 years