Investment in debt instruments in India by non-resident investors is governed by inter alia the Foreign Exchange Management (Debt Instruments) Regulations, 2019 and the Master Direction - Reserve Bank of India (Non-Resident Investment in Debt Instruments) Directions, 2025 (“RBI Master Direction”).
For investment in debt securities by FPIs, the RBI Master Direction identifies certain investment routes. While the fully accessible route and the scheme for trading and settlement of sovereign green bonds provides exclusively for investments into government securities and sovereign green bonds respectively, the general route and the voluntary retention route (“VRR”) allows FPIs to invest in corporate debt securities along with other central and state government securities. Investments made through general route are subject to certain macro prudential norms including short term investment limits, minimum residual maturity and concentration limits, which are not applicable in case of investments made under the VRR. These relaxations made VRR a favorable mode of investment for FPIs in the past, provided that the FPIs had committed to stay invested for the minimum retention period.
To ease the investment process for FPIs and boost inflows into short-term corporate bonds under the general route, the Reserve Bank of India (“RBI”), through its circular dated May 8, 2025, titled “Investments by Foreign Portfolio Investors in Corporate Debt Securities through the General Route – Relaxations” (“RBI Circular”), has withdrawn the applicable short-term investment and concentration limits for FPI investments in corporate debt securities.
Prior to the notification of the RBI Circular, FPIs willing to invest in corporate debt securities under the general route could only invest up to a maximum 30% of their total investment in corporate debt securities in short term bonds (with a residual maturity of up to one year). Further an FPI, together with its related parties could only invest in corporate debt securities up to a maximum of 10% of the prevailing investment limit, and up to 15% in cases where the FPI was a sovereign wealth fund or a multilateral agency or a pension/insurance/endowment fund or a foreign central bank. Whereas, under the VRR route, currently, FPIs can invest up to INR 2.5 trillion in corporate debt securities subject to a retention period of at least three years.
The removal of short term investment limits and concentration limits on investments by FPIs under the general route, will now allow FPIs to utilize the complete headroom available to them for investing in short term corporate debt securities instead of only 30% of their total investment in corporate debt securities.
Also, with the 15% cap on investments by FPIs in corporate bonds removed, FPIs will now have greater flexibility in structuring their debt portfolio including deploying more investments into short term high yield corporate bonds, allowing them better maneuverability in response to the prevailing market conditions. The increase in demand for short term corporate bonds will also increase liquidity in the secondary market, making it attractive for retail investors as well.
While the above measures may ease inflow of funds from FPIs, under the general route, for corporate debt securities, conversely, it can also make the corporate debt markets more vulnerable to sudden inflows and outflow, particularly during episodes of global financial stress.
It should be noted that while the above measures are designed to make the Indian corporate bond market more attractive, specifically under the general route, the aspect of withholding tax on interest earned on investments at 20% (subject to tax treaties) instead of the pre-July 1, 2023 levels of 5%, would still remain a deterrent.
Lastly, it is imperative to note that though short-term investment limits and concentration limits have been removed, the issue-wise limits and the minimum residual maturity requirements still remain. Ease in the issue-wise limits is a long-standing demand from most FPIs, a concern which is yet to be heard and addressed by the RBI.
This insight has been authored by Arpita Garg and Prajjwal Tiwari from S&R Associates. They can be reached at [email protected] and [email protected], respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.