RBI withdraws 20% limit on investments by FPIs in Corporate Bonds

The Reserve Bank of India (RBI) has withdrawn the earlier order which stipulated a 20% limit on investments by FPIs in Corporate Bonds.

Why the limit was imposed and why it is being withdrawn?

During the review of the FPI investment in corporate debt in April 2018, the limit was introduced to incentivize the FPIs to maintain a portfolio of assets. But the market feedback suggested contrary. The market feedback suggested that foreign portfolio investors (FPIs) have been constrained by this stipulation.
As a result, to encourage a wider spectrum of investors to access the Indian corporate debt market, RBI has decided to withdraw the 20% limit on investments by FPIs in Corporate Bonds.

Foreign portfolio investment (FPI)

FPI consists of securities and other financial assets passively held by foreign investors. FPI does not provide the investor with direct ownership of financial assets. 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 countries capital account and is listed on its balance of payments (BOP).

Differences between FPI and FDI

FPI allows the investor to purchase stocks, bonds or other financial assets in a foreign country and the investor does not actively manage investments or companies that issue investment. Also, the investor does not have control over securities or business.
Whereas in FDI, the investor has a direct business interest in the entity into which the investment is made. The investor controls his monetary investments and actively manages the company into which the investments are made. FPI is more liquid and less risky than FDI.

Month: Current Affairs - February, 2019