RBI eases investment norms for foreign portfolio investors (FPIs) in debt

The Reserve Bank of India (RBI) has eased investment norms for foreign portfolio investors (FPIs) in debt, especially into individual large corporates. This move is aimed at attracting more overseas flows and thereby help to arrest recent fall in rupee and also lift recent fall in demand for corporate bonds.

Key Facts

Corporate bond segment: FPIs are permitted to invest in corporate bonds with minimum residual maturity of above 1 year. The short-term investments in corporate bonds by an FPI shall not exceed 20% of total investment of that FPI in corporate bonds.
Government securities (G-secs): The FPIs cap on investment in Government securities (G-secs) has been increased to 30% of outstanding stock of that security, from 20% earlier. FPIs were allowed to invest in government bonds with minimum residual maturity of three years.
Removal of minimum residual maturity requirement: FPIs are permitted to invest in G-secs, including treasury bills (T-bills), and SDLs without any minimum residual maturity requirement.  However, it will be subject to condition that short-term investments by FPI under either category shall not exceed 20% of total investment of that FPI in that category. In this case, short-term investments are defined as investments with residual maturity up to 1 year. The short-term investments by an FPI may exceed 20% of total investments, only if the investments are entirely made on or before April 2018, and not made after it.

Foreign portfolio investment (FPI)

FPI consists of securities and other financial assets passively held by foreign investors. It does not provide investor with direct ownership of financial assets. It is relatively liquid depending on volatility of the market. In India, FPIs are allowed to invest in various debt market instruments such as government bonds, treasury bills, state development loans (SDLs) and corporate bonds, but with certain restrictions and limits. FPI is part of country’s capital account and shown on its balance of payments (BOP).

Differences between FPI and FDI

FPI lets investor purchase stocks, bonds or other financial assets in foreign country. In this case, investor does not actively manage investments or companies that issue investment. It also does not have control over securities or business. In contrast, FDI lets investor purchase direct business interest in foreign country. The investor also controls his monetary investments and actively manages company into which he puts money. FPI is more liquid and less risky than FDI.

Month: Current Affairs - June, 2018