Current Affairs

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

The Reserve Bank of India (RBI) has withdrawn the earlier order which stipulated a 20% limit on investments by FPIs in Corporate Bonds.

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

Reason for imposing the limit and withdrawing it:

  • 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.
  • However, 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.

About 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 a country's capital account and is listed on its balance of payments (BOP).

FPI vs FDI

FPI:

  • 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.
  • FPI is more liquid and less risky than FDI.

FDI:

  • 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.

Question:

Q. The Reserve Bank of India (RBI) has withdrawn the earlier order which stipulated a 20% limit on investments by FPIs in which instruments?
a. Masala Bonds
b. P-Notes
c. Corporate Bonds
d. Industrial Bonds
20% limit on investments by FPIs in Corporate Bonds lifted by RBI 20% limit on investments by FPIs in Corporate Bonds lifted by RBI Reviewed by Shweta Kashyap on February 17, 2019 Rating: 5

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