Debt market: RBI raises REIT limit in debt market to Rs 2.5 lakh crore

The Reserve Bank of India (RBI) has raised the limit for Foreign Portfolio Investors (REITs) to invest in the local debt market under the Voluntary Retention Track (VRR) from Rs 1 lakh crore to Rs 2.5 lakh crore, effective April 1. The revised investment limits were notified on Thursday.

The VRR was introduced in March 2019 by the RBI as a separate channel for REITs to invest in the debt markets in India. Foreign investors investing through this channel must invest their funds for three years, but such investments are exempt from macroprudential requirements and other regulations.

“The VRR for investment in government and corporate debt securities by REITs was introduced on March 1, 2019 with a view to facilitating stable investments in debt instruments in the country. The pathway aimed to provide a separate channel, largely free from macroprudential controls, for REITs with long-term investment horizons.A dedicated investment limit of Rs 1.50 lakh crore has been set for investments under the VRR. Following the positive response to the VRR, as evidenced by the near exhaustion of the current limit, it is proposed to increase the investment limit under VRR from Rs 1 lakh crore to Rs 2.5 lakh crore with effect from 1 April 2022. revised investment limits are notified today,” Governor Shaktikanta Das said in a post-policy announcement.

The central bank had earlier raised the VRR limit to Rs 1.5 lakh crore from Rs 75,000 crore in January 2020 to attract stable foreign dollars to the country. The data shows that the limit has been fully utilized. The RBI’s move could partly offset disappointment over the lack of mention of steps to be included in the global bond index and allow for more entries.

Das said a larger portion of inflows is invested in corporate bonds, but with an additional Rs 1 lakh crore now coming from outside, this will help ease the pressure on domestic borrowing needs. “It is possible that some who took a 90 day paper could convert to 1 year and the one year investment could be increased to three years which will lead to more inflows in the market. So there will be a net addition to the availability of resources to support the Gsec market and the domestic corporate bond market.After the budget, the Ministry of Finance clarified that small economies may increase this year.For the next financial year, the government has assumed a conservative Rs 1.2 lakh crore. We need to keep these factors in mind. Let the next financial year begin and we will consider what action to take,” Das said in response to a question about the impact of the increased limit on the local debt market.

However, some market participants said that global yield-hungry investors will weigh their options carefully and that a higher limit will not necessarily result in increased flows. “Overall, rates are up as the RBI has so far refused even to signal a change in stance. Investors would prefer other higher yielding papers as the difference is not that great. The limit has been used so far, but we’ll have to wait and watch what happens from here,” said Naveen Singh, head of fixed income at ICICI Securities Primary Dealership.

The local debt market was expecting an announcement in last week’s budget for the government to take steps to ensure that India’s sovereign paper is included in global bond indices, which could have allowed REITs to allocate higher limits to the country. Responding to a question on the RBI’s stance on the same Das said India’s inclusion decision will be “calibrated”.

“Our approach was very calibrated. Last year we introduced the FAR, the fully accessible route, where there was no limit on the amount of REITs that could come in. The inclusion of bonds works both ways , you have a greater flow of resources into the country, but when the index turns unfavorable, there could also be sudden outflows.The strongest part of our debt profile is that it is largely denominated in Indian rupees and the FX exposure is only 5% to 6%. This is precisely why the RBI and the government are taking a calibrated approach on this issue,” Das said.

Tana T. Thorsen