The Reserve Bank of India ("RBI"), on 10 February 2022, increased limits under the voluntary retention route ("VRR") for foreign investment in domestic Rupee bonds, to provide additional liquidity to the Indian debt market.  

Change in Limit:

The VRR was introduced in 2019 to benefit foreign portfolio investors ("FPIs") and gives flexibility over instruments in exchange for a commitment to invest in Indian debt for 3 years. The earlier VRR limit, which was fully utilized, was Rs.1,50,000 crores (approx. US 20 billion). Now it has increased to Rs.2,50,000 crore (approx. US 33 billion) with effect from 1 April  2022. The limits will be auctioned by RBI over the coming months. Investment can be in corporate debt, Government bonds, repo, reverse repo or exchange traded debt funds.

The minimum investment of an FPI during the 3 year period can be between 75% to 100% of the committed investment amount of the VRR limit obtained, so there is an ability for FPIs to adjust based on their investment philosophy). Investment has to be effected within 3 months of getting an allotment of the limit. "Investment" also means cash holding in Rupee bank accounts so does provide some timing flexibility for deployment.

At the end of the 3 year retention period, an FPI, if it wishes can  opt to continue the VRR for an additional identical 3 year period. If the FPI decides not to continue under VRR, it may: (a) liquidate its portfolio and exit; or (b) move its investments to the 'General Investment Limit' (without VRR benefits); or (c) hold its investments until maturity or until it is sold, whichever earlier.

Expectations for the Future:

The potential inclusion of government bonds in global indices, and the fact that VRR can help prevent sudden shocks of significant foreign exchange outflows for India, assist the case for increasing the limits. VRR offers higher operational flexibility against the commitment of a minimum holding period and is seen as mitigating the risk of Rupee volatility. This is a welcome step to support Indian debt markets. The inability to obtain VRR limits earlier, meant that foreign portfolio investors had to seek to buy limits in the secondary market which increased their transaction costs. We expect that step will also assist foreign investors to effect bespoke transactions without the worry of having to purchase VRR limits in the secondary market, or any concentration limits, residual maturity or exposure limits applying. 

The above is a generic analysis and should not be regarded as a substitute for specific advice based on the facts of a client's objectives and specific commercial agreements reached. Please do reach out to us at for any queries.