RBI increases debt market REIT limit to Rs 2.5 lakh crore

On February 10, 2022, the Reserve Bank of India (RBI) said that it had raised the limit for Foreign Portfolio Investors (REITs) to invest in the local debt market from Rs 1 lakh crore to Rs 2, 5 lakh crore under the voluntary retention pathway. (VRR) from April 1.

According to RBI Governor Shaktikanta Das, the VRR will be revised on April 1 to provide a separate channel, free from macroprudential controls, for REIT investments in government and corporate debt securities.

What is VRR?

The Reserve Bank of India (RBI) has introduced the Voluntary Retention Route (VRR) to help Foreign Portfolio Investors (REITs) invest in Indian debt markets. These investments are exempt from the macro-prudential requirements and other regulations that apply to investments by REITs in the debt markets. REITs will be required to commit to maintaining a minimum percentage of their investments in India for a period of their choosing.

Benefit for businesses seeking debt financing

Investing by REITs under the VRR regime will help REITs invest in a high yield segment with corporate debt and GSecs. This will benefit companies seeking debt financing and will benefit the margin for long-term investment/capacity expansion.

Increasing the VRR limit will attract additional funds

The improvement of the VRR limits for investments by foreign portfolio investors from Rs 1 lakh crore to Rs 2.5 lakh crore is a positive step, as the existing VRR limits are almost exhausted, even though the REIT’s overall investment in government securities and corporate bonds has been on a downward trend in recent years. This increase in the limit will attract additional funds in the context of increased planned government borrowing.

Great operational flexibility

A further increase in VRR limits can help prevent sudden shocks in the form of large outflows, as it provides greater operational flexibility over committing to a minimum holding period and is considered to mitigate the risk of volatility of the rupee.

Governor Shaktikanta Das also announced on Thursday that India’s economic growth rate will be 7.8% for the financial year 2022-23.

Tana T. Thorsen