RBI Abolishes ₹2.5 Trillion Cap on Voluntary Retention Route to Attract Foreign Capital
In a significant move to bolster foreign investment inflows, the Reserve Bank of India (RBI) has announced the removal of the ₹2.5 trillion ceiling applicable to investments under the Voluntary Retention Route (VRR). This strategic decision is designed to draw greater overseas capital into India's debt markets by eliminating artificial constraints on long-term investors.
Governor Sanjay Malhotra Clarifies New Framework
RBI Governor Sanjay Malhotra stated on Friday that investments through the VRR will now be governed by the existing investment ceilings for respective security categories under the general route. "Investment through the VRR in each category of securities will be subject to the investment ceiling for the respective category under the general route," Malhotra explained, signaling a shift towards a more integrated regulatory approach.
Understanding the Voluntary Retention Route
Introduced in 2019, the VRR scheme aims to encourage foreign portfolio investors (FPIs) planning long-term commitments to India's debt markets. The route offers regulatory flexibility by exempting participants from certain norms, provided they voluntarily agree to retain a minimum percentage of their investments in India for a specified period. This framework grants FPIs enhanced operational flexibility through a diverse choice of financial instruments.
Data from the National Securities Depository Ltd (NSDL) reveals that as of February 5, ₹2.04 trillion of the previous ₹2.5 trillion VRR limit had already been allocated to investors, highlighting strong foreign interest.
Industry Experts Welcome the Move
Venkatkrishnan Srinivasan, founder of financial advisory firm Rockfort Fincap LLP, praised the RBI's decision. "Now, foreign investors who are willing to commit their funds for a minimum period can invest without worrying about the VRR quota getting exhausted," he said. Srinivasan emphasized that these investments will remain within the existing overall limits for government bonds, state loans, and corporate bonds, ensuring regulatory safeguards are maintained.
He further noted that the central bank is demonstrating its commitment to not restrict stable, long-term foreign investors through artificial caps, while continuing to uphold essential regulatory protections.
Recent Liberalizations in Foreign Investment Rules
This move follows the RBI's earlier decision in May to grant foreign investors greater freedom to purchase Indian corporate bonds, including the removal of short-term investment and concentration limits from the rules governing foreign investments in corporate bonds. These steps collectively reflect a broader trend of easing restrictions to attract global capital.
Ample Room for Growth in Corporate Bonds
Foreign investors currently have substantial capacity to increase their holdings in Indian corporate bonds. NSDL data indicates that as of February 5, FPIs had utilized only 14.2% of their aggregate corporate bond investment limit of ₹8.8 trillion. This figure was marginally higher at 14.6% on the same date last year, suggesting significant untapped potential for further foreign investment in this segment.
The RBI's latest policy adjustment is expected to enhance India's appeal as a destination for stable, long-term foreign portfolio investment, supporting deeper and more liquid debt markets while aligning with global investment practices.
