How RBI paved the way for overseas inflows via Voluntary Retention Route

While the higher limit may have been done with an eye on government borrowing, analysts expect a substantial amount to flow into corporate bonds.

CPPIB, CDPQ, Ontario Teachers’, Templeton, Capital Investment, Schoders, GIC OMERS, and People’s Bank of China are among investors likely to invest.

Individual investors did not respond to ET’s queries. CDPQ and Ontario declined to comment.

“The additional investment limit is likely to be used up in the first seven-eight months as these would be mostly structured bilateral deals in the shape of a bond,” said Jayesh Mehta, head country treasurer at Bank of America.

“Such bond deals do not vary much depending on macro scenarios as investors are looking for specific requirements.”

“Investors fix terms with issuers bilaterally amid other commercial considerations,” he said.

A global parent company can also invest in local subsidiaries using the VRR route.

“The increase in VRR limit by the RBI will attract global investors betting on local corporate bonds and g-secs,” said Sriram Krishnan, managing director at Deutsche Bank India. “With the rebounding of the economy, companies will likely have better credit worthiness, a key draw for overseas investors that find the rupee as a relatively stable currency.”

VRR offers higher operational flexibility against the commitment of a minimum holding period and is seen as mitigating the risk of rupee volatility.

“India offers better risk-adjusted returns to global investors given the strong macro indicators which are likely to improve further over the coming years,” said Hemant Mishr, founder and CIO at SCUBECapital, Singapore. “In addition to incremental capital, it will attract patient capital i.e long term stable investors like sovereign or endowment funds seeking to generate higher returns than their home countries.”

“With rising US Treasury yields they are now at a risk of facing mark-to-market losses,” he said.

The benchmark yielded 6.70 percent versus 2 percent in the US gauge.

As on February 10, FPIs utilised 1.33-34.06 percent of their total limits in general central and state government debt securities. They have exhausted about one-fifth of the limits for corporate bonds pegged at Rs 6.07 lakh crore, show data from NSDL, depository.

VRR was recommended in October 2018 to bring in long-term funds into debt assets. The move was expected to shield the rupee against a strengthening dollar.

RBI Thursday increased the limit for FPIs to invest in the local debt market under the voluntary retention route (VRR) by Rs 1 lakh crore to Rs 2.5 lakh crore, to be effective from April 1 this year.