A trader reacts as he monitors financial information on computer screens on the trading floor at Panmure Gordon & Co., while results continue to be announced in the 2015 general election in London, U.K. (Photographer: Chris Ratcliffe/Bloomberg)

India Monetary Policy: RBI Proposes New Scheme To Boost And Retain FPI Debt Investments

The Monetary Policy Committee’s decision to hold rates steady will be seen as a negative for the Indian rupee, which has slipped more than 12 percent this year. Foreign portfolio investors have already sold a net of Rs 66,000 crore in Indian debt and equity so far this year. Much of this selling has been centred in the debt markets.

“The rupee seems headed for 75, given that RBI is focusing on flushing the system with liquidity and protecting the financial systems rather than protecting the currency,” said Saurabh Mukherjea of Marcellus Investment Managers.

It is probably in anticipation of such fears that the RBI has proposed a new VRS scheme.

Aimed at reducing volatility of debt flows and their implications for the currency markets, the RBI said it is proposing to introduce a 'voluntary retention scheme' for investments by foreign portfolio investors in the debt markets.

"Under the proposed Route, FPIs will have more operational flexibility in terms of instrument choices as well as exemptions from regulatory provisions such as the cap on short-term investments (less than one year) at 20% of portfolio size, concentration limits, and caps on exposure to a corporate group (20% of portfolio size and 50% of a single issue). To be eligible to invest under this route, FPIs would need to voluntarily commit to retain in India a minimum required percentage of their investments for a period of their choice."

The detailed discussion paper released later on Friday evening proposed the following framework:

  • Investment through this route will be in addition to the permitted foreign investment limit.
  • The total amount to be invested via this route would be decided by the RBI.
  • Limits to individual FPIs would be allotted via an auction process.
  • The criteria for allocation of investment amount shall be the retention period proposed by the FPI.
  • The minimum retention period shall be three years, or as decided by RBI for each auction.

While the thought process behind the proposal is to draw in more stable and long term debt flows, the attractiveness of the route may be limited at a time when foreign investments are not completely used up. Also with the currency under pressure, investors may be reluctant to make a long term commitment to Indian debt, which is locked in for a period of three years.

Comments on the proposal have been invited until October 19.

Amandeep Chopra, group president and head of fixed income at UTI AMC, was not confident this measure would help much in retaining foreign flows either.

A good part of risk of sentiments that exists in emerging markets is also reflected in FDIs and FPIs pulling money outof Indian bond markets. Maybe to assuage their concerns, RBI is giving a dispensation that as long as they commit certain amount of their corpus staying invested in India. They will allow them some degree of flexibility in the maturity restrictions that exist today. That, in my view, is a temporary measure and will not help much in retaining flows if the broader macro picture or the sentiment for EMs continues to be weak.
Amandeep Chopra, Group President and Head of Fixed Income, UTI AMC