MUMBAI: With the Reserve Bank of India (RBI) relaxing investment norms for foreign portfolio investors (FPIs) in the corporate bond market recently, experts believe that this will encourage them to participate more aggressively.
Earlier, FPIs had to mandatorily sell bonds with less than a year of residual maturity or increase their overall investment to bring the concentration in one-year residual maturity to below 30%. Due to this stiff regulation, FPI participation used a mere 14.3% (Rs 1.1 lakh crore) of the overall investment limit of Rs 7.63 lakh crore.
With this restriction lifted, FPIs can now hold maturing papers until maturity, providing them greater flexibility and reduced regulatory hurdles.
The RBI has also been increasing the investment limit for FPIs in corporate bonds, with the ceiling raised to Rs 8.22 lakh crore for April-September 2025 and Rs 8.80 lakh crore for October 2025-March 2026, indicating its efforts to attract more foreign investment.
“The change brought by RBI is to address practical issues rather than making a structural shift in how RBI views foreign investments in the Indian bond market. It is a fine-tuning of a difficult-to-meet compliance,” said Ajay Bagga, a market veteran.
Vishal Goenka, Co-Founder at Indiabonds, stated that the move would give FPIs more flexibility to manage their portfolios. “FPIs will have flexibility,” he said, adding that India is a comfortable investment destination for FPIs, given the problems investing in Russia and China.
“The relaxation in corporate bond is a huge psychological move, the first step towards a bigger future outcome, giving FPI confidence on the country’s policy,” said a fixed-income fund manager at a domestic mutual fund.
While RBI’s latest guidelines do not directly impact the government bond market, fund managers believe that with the overall push towards deepening of the bond market, there will be further improvement FPI sentiments towards Indian debt securities. “Global index inclusions, such as JP Morgan’s GBI-EM and FTSE Russell’s EMGBI, typically span 5-10 years or more. These inclusions put India in focus, starting with government securities (G-Secs), and as investors gain comfort with the country’s economic landscape, they gradually move down the credit curve, exploring other investment opportunities beyond index trackers.”
However, Bagga believes that the impact of the move on FPI inflows might be limited in the immediate future, given the expected rate cuts in India and the US.
“Indian rates are expected to fall further, with market chatter of a rate cut in the June RBI MPC, and US rates not expected to fall till September at least. The differential (10-year G-Sec) between India and the US will be too low to encourage additional flows looking for yields,” he said.
In the last two months on concerns over trade tariffs, FPIs have sold close to Rs 12,000 crore of Indian corporate bonds from Rs 1.2 lakh crore on March 28, 2025, to Rs 1.08 lakh crore on May 23, 2025. Currently, the differential between 10-year Indian and US paper is at a two decadal low of 176 bps.
A banker, speaking on condition of anonymity, said that while the move is positive, RBI’s core philosophy of India’s FPI debt policy is to favour longer-duration investments over short-term inflows. So, currently it is testing waters to see whether relaxations can attract foreign players in the corporate debt market, at least for the short term.
Source: The Financial Express
