RBI to enhance VRR cap for foreign investors by Rs 1 lakh from April 1
The voluntary retention route (VRR) cap for foreign portfolio investors (FPIs) will be enhanced by Rs 1 lakh crore to Rs 2.50 lakh crore, given the increased interest shown by them, RBI governor Shaktikanta Das announced on Thursday.
The enhancement of VRR, which seeks to provide a separate channel, broadly free of macro-prudential controls, to FPI investments in government and corporate debt securities will be applicable from April 1, Das said.
He said a dedicated investment limit of Rs 1.5 lakh crore was set for investments under VRR earlier. The enhancement is being done “given the positive response to the VRR as evident from the near exhaustion of the current limit”, Das noted.
The VRR scheme was introduced in 2019. Under this scheme, FPIs have been given greater operational flexibility in terms of instrument choices besides exemptions from certain regulatory requirements. However, one of the condition is that the minimum retention period should be three years.
The move also comes at a time the hardening of rates in developed markets is increasing investor interest in other markets.
Bond yields moderated after the RBI hiked the cap on the voluntary retention route for FPIs. It is expected to give some relief to the markets given the huge central government borrowing next year.
Yields on the benchmark 10year paper settled at 6.73 per cent against the previous close of 6.79 per cent as the monetary policy committee (MPC) did not raise the reverse repo rate and retained the accommodative stance.
The lower than expected inflation forecast also came in as a pleasant surprise. While market circles were earlier expecting a repo rate hike sometime in April, this is expected to happen later, unless inflation turns rogue and remains above the upper bound of 6 per cent.
Bond yields have been on their way up after Budget documents showed that the government will borrow around Rs 14.95 lakh crore in the next fiscal. Though economists still expect yields on the 10year paper to breach the 7 per cent sometime after April, they added that bond yields may not exhibit a sharp upmove at least in the immediate term.
“With the Governor dousing fears of premature tightening and no additional MPC member voting for a stance change, a shift to a neutral stance in April 2022 appears to be ruled out, unless the CPI inflation exceeds the upper threshold of 6 per cent in both January and February 2022.. We continue to expect the 10year yield to cross 7 per cent in April 2022, once the 202223 borrowing programme kicks off. However, it is likely to climb more slowly thereafter, given the postponement in the likely timing of the first repo rate hike to August 2022 or later, from our earlier expectation of June 2022.” Aditi Nayar, Chief Economist, ICRA said.