InvestorQ : I just read that the RBI has doubled the debt limit for FPIs. Will that result in more FPI flows into debt?
Debbie Mascarenhas made post

I just read that the RBI has doubled the debt limit for FPIs. Will that result in more FPI flows into debt?

Answer
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Crowny Pinto answered.
8 months ago


The RBI has increased the limit under the Voluntary Retention Route (VRR) scheme from Rs.75,000 crore to Rs.150,000 crore. Under the VRR, the FPIs can invest in Indian debt but that amount is locked in for a period of 3 years. Here is what you need to know about its implications.

· Currently, the VRR limit is not yet fully utilized. The FPIs have invested only up to Rs.55,000 crore so it is not clear how much the additional limit will impact flows.

· The FPI flows into Indian debt is largely based on the real rate returns (net of inflation). One year back, this real rate was close to 4%, which was very attractive. But with inflation at 7.35% and 135 bps rate cuts, the real rate has turned negative in 2020. That will not make Indian debt very attractive to FPIs.

· The current strength is an important factor when FPIs invest in Indian debt and that is more likely to remain volatile. FPIs prefer a stable currency so that their dollar value of investment is not jeopardized.

· Normally, debt investments in India are part of overall emerging market (EM) allocations. It normally happens in a stack and currently global bond investors are cautious due to negative debt returns in India.

While the enhanced limit is good optically, it is not clear how much it will really impact the flow of money into Indian debt. For that; real interest rates could hold the key.