India Monetary Policy: RBI Announces 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 announced a new VRS scheme.

Aimed at reducing volatility of debt flows and their implications for the currency markets, the RBI said it will 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."

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