At a time when foreign investors are dumping Indian rupee bonds, the government is creating room for more foreign portfolio investment in Indian debt. The Reserve Bank of India (RBI) on Thursday doubled the investment limit for FPIs (foreign portfolio investors) in government and corporate bonds to Rs 1.5 lakh crore, via the Voluntary Retention Route and allowed them to invest in exchange-traded funds (ETF) that invest only in debt instruments. The government also plans to launch the second tranche of its Bharat Bond ETF having mopped up Rs 12,400 crore in December 2019 from the first tranche.
Apprehensive of a high budget deficit, that could push up government borrowings and yields, FPIs have been selling rupee bonds – sales have crossed $1.5 billion in January so far on the back of sales in November and December. However, the Bhart Bond ETF — with investment in bonds of state-owned firms – could attract FPI money, market experts said. “FPIs that have been allotted investment limits under VRR may, at their discretion, transfer their investments made under the general investment limit to VRR,” the RBI said. Investments in the VRR, as on December 31, 2019, were only around Rs 54,300 crore; with the revised cap, the room for fresh allotments would rise to Rs 90,630 crore, the RBI said.
The VRR route was opened in March last year. Investments through the route will be free of the macro-prudential and other regulatory norms applicable to FPI investments in debt markets, provided FPIs voluntarily commit to retain a required minimum percentage of their investments in India for a period. The minimum retention period shall be three years, or as decided by RBI for each allotment by tap or auction.
In early December, the Cabinet Committee on Economic Affairs had approved the creation and launch of Bharat Bond Exchange Traded Fund (ETF), the country’s first corporate bond ETF through which retail investors can invest in corporate bonds with just Rs 1,000. The ETF is a basket of bonds issued by Central Public Sector Undertakings (CPSUs), Central Public Sector Enterprises (CPSEs), Central Public Financial Institutions (CPFIs) or any other government organisation.