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Voluntary retention route for foreign portfolio investors

Topics Covered: Inclusive growth and issues arising from it.

Voluntary retention route for foreign portfolio investors

What to study?

For Prelims and Mains: VRR- meaning, features and significance.

Context: In a big relief to the capital markets, even as the coronavirus pandemic continues to hit economies and markets worldwide, foreign portfolio investors (FPIs) significantly reduced the pace of outflows in April, after a record net outflow of Rs 1,18,203 crore in March 2020. In April, FPIs pulled out a net of Rs 14,858 crore from equity and debt markets.

They were, however, net positive investors in debt voluntary retention route (VRR) scheme. They invested a net of Rs 4,032 crore in debt VRR schemes in April.

What is VRR?

It is a new channel of investment available to FPIs to encourage them to invest in debt markets in India over and above their investments through the regular route. The objective is to attract long-term and stable FPI investments into debt markets while providing FPIs with operational flexibility to manage their investments.

VRR scheme allows FPIs to participate in repo transactions and also invest in exchange traded funds that invest in debt instruments.

When was this route proposed?

This new investment route was proposed by the central bank in October 2018 at a time the rupee was weakening against the dollar very sharply. There were also talks of a special NRI bond scheme to attract more dollar funds into the economy and stabilise the rupee.

How are they different from the regular FPI investments?

Guidelines say that investments through VRR will be free of the macro-prudential and other regulatory prescriptions 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 of their choice. But the minimum retention period shall be three years, or as decided by RBI.

How much money can an FPI invest through this route?

Investments under this route as of now shall be capped at Rs 40,000 crore for VRR-GOVT and 35,000 crore per annum for VRR-COPR. But the limit could be changed from time to time based on macro-prudential considerations and assessment of investment demand. There will be separate limits for investment in government securities and investment in corporate debt.

Insta Links:

Prelims Link:

  1. Difference between FDI and FII.
  2. Limits on FII.
  3. What is VRR scheme? Limits.
  4. Limits on FDI in various sectors.

Sources: Indian Express.