Context:
To encourage Foreign Portfolio Investments (FPIs) in India’s debt markets, the Reserve Bank of India (RBI) has launched the Voluntary Retention Route (VRR).
Unlike traditional FPI norms, VRR allows investments exempt from certain regulatory requirements, provided FPIs commit to retaining a minimum portion of their investments in India for a specific duration.
Key Details about the Voluntary Retention Route:
- Background: To counter a sharp depreciation of the rupee in October 2018, the central bank unveiled a new investment route (VRR) alongside exploring a special NRI bond scheme, both aimed at attracting dollar inflows. The RBI had introduced VRR in March 2019.
- Purpose: VRR aims to attract stable, long-term FPI investments into India’s debt markets, offering operational flexibility to FPIs.
- Eligibility: Any entity registered with the Securities and Exchange Board of India (SEBI) as an FPI can utilize the Voluntary Retention Route.
Key difference between VRR and FPI:
- VRR investment differs from regular FPI in two key ways 1) Flexible retention periods and 2) Exemption from certain regulations, as long as investors commit to a minimum 3-year lock-in.
- VRR trades regulatory freedom for commitment. While regular FPI faces stricter norms, VRR allows flexibility in retention periods and regulations in exchange for a minimum 3-year lock-in.
Investment Conditions:
- Separate Indications: Investments under VRR are categorized into corporate debt (VRR-Corp) and Government securities (VRR-Govt).
- Allocation Process: FPIs receive individual investment allocations through an auction process, with the committed portfolio size (CPS) determined based on the proposed retention period.
- Investment Requirements: FPIs must invest the allocated CPS in debt instruments and maintain it throughout the retention period, with a minimum investment of 67% of the total CPS.
Impact on Currency and Economy:
- Currency Appreciation: Increased FPI flow through VRR may lead to a surge in dollar circulation, potentially appreciating the Indian Rupee against the US dollar.
- Economic Growth: VRR can contribute to India’s economic growth by attracting stable FPIs into the debt markets, and bolstering investment opportunities.
Proposal for Increased Investment Limit:
- Current Limit: The existing overseas investment limit in VRR stands at Rs 90,630 crore, which has been fully utilized.
- Expansion Proposal: The RBI is considering raising the overseas investment limit in VRR by an additional Rs 40,000 crore, aiming to attract more foreign capital into Indian local debt securities.
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