Reserve Bank of India (RBI) has relaxed certain investment norms for Foreign Portfolio Investors (FPIs) in the corporate bond market under the general investment route. The move, effective immediately, aims to increase foreign participation and investment inflows in India’s corporate debt segment.
Key Highlights of RBI’s Announcement
Relaxation of Two Key Limits:
Short-Term Investment Limit – Removed
- Earlier: FPI investments in corporate bonds with residual maturity of up to one year were capped at 30% of total FPI investment in corporate bonds.
- Now: This cap has been removed, giving FPIs more freedom to invest in short-term debt instruments.
Concentration Limit – Removed
- Earlier:
- 15% cap for long-term FPIs
- 10% cap for other FPIs (per issuer)
- Now: These concentration caps have been removed under the general route.
- Note: These restrictions never applied under the Voluntary Retention Route (VRR), which already allowed more flexibility.
Objective & Significance
- Purpose:
- To boost FPI participation in India’s corporate bond market
- To give FPIs greater flexibility in portfolio construction and exit strategies
- Significance for Market:
- Helps enhance liquidity in corporate bond markets
- Could attract short-term investors who were previously deterred by rigid norms
- May help bridge the low utilisation of the FPI investment cap (only 14.5% utilised as of May 7, 2025)
Background
- In April 2025, RBI conducted a review of investment limits for FPIs in both government and corporate bonds.
- Maintained existing overall cap of 15% for corporate bonds for FY 2025–26.
- Set limits as:
- ₹8.2 lakh crore for H1 FY26
- ₹8.8 lakh crore for H2 FY26
- As per Bond market experts, while this move offers flexibility, actual inflows will depend on interest rate differentials between India and the US, and corporate credit risk.
What are Corporate Debt Securities?
- Instruments like corporate bonds, debentures, non-convertible debentures (NCDs), and commercial papers issued by companies to raise funds.
Key Features:
- Represents loans from investors to companies.
- Offers fixed interest payments over time.
- Principal is repaid at maturity.
Why Companies Issue Them:
- To raise capital for expansion, debt repayment, or acquisitions.
- Provides an alternative to equity financing.
- Interest payments are tax-deductible.
Why Investors Prefer Them:
- Fixed income source
- Generally less risky than equity.
- Diversifies portfolio.
Types of Corporate Bonds:
- Investment-Grade Bonds – Low risk (e.g., AA, A ratings)
- High-Yield (Junk) Bonds – Higher risk, higher return (e.g., BB, B)
- Convertible Bonds – Can be converted into equity shares
What is Foreign Portfolio Investment (FPI)?
FPI refers to passive investments by foreign entities in financial securities like stocks and bonds, without acquiring control or management interest.
Key Characteristics:
- Short-term, market-driven investments
- Enhances market liquidity
- Highly volatile, sensitive to global economic or political changes