RBI offers long term investment benefits to FPIs to stem rupee volatility

To limit volatility in the rupee due to sharp capital outflows, the central bank is set to introduce a 'voluntary retention route' for investments by foreign portfolio investors (FPIs) in the debt markets.

After maintaining a status quo on the repo rate, the Reserve Bank of India (RBI) proposed a special route to encourage FPIs willing to undertake long-term investments.

“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 percent of portfolio size, concentration limits, and caps on exposure to a corporate group (20 percent of portfolio size and 50 percent of a single issue),” RBI said in a statement on developmental and regulatory policies.

Reports suggest FPIs have sold a net of Rs 66,000 crore in Indian debt and equity so far this year. A large part of this selling has been in the debt markets.

The rupee has depreciated almost seven percent in the past two months and breached 74 levels on October 5, to touch an all-time low of 74.23 after the monetary policy announcement.

"Basically, RBI wants to calm down the volatility in the rupee.  Although this move is just a temporary solution, the sharp movement can be contained if FPIs use this," said Hariprasad MP, Senior Vice President and Head Treasury at Centrum Direct.

“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. FPIs would apply for investment limits under the route through an auction process,” the banking regulator added.