At a time when Foreign Portfolio Investors (FPIs) are pumping in investments into Indian equity markets, with July inflows already crossing ₹43,000 crore, efforts to keep them invested in the debt market over the longer term seem to be failing.

One such instrument, called the Debt Voluntary Retention Route (Debt VRR), has seen a net outflow of over ₹3,526 crore this year. The Reserve Bank of India (RBI) introduced a scheme for the Voluntary Retention Route (VRR) for investments by FPIs in debt markets in India on March 1, 2019. This scheme enables FPIs to invest in debt markets free of the macro-prudential norms and other regulatory norms applicable to FPI investments, provided FPIs voluntarily commit to retain a minimum percentage of their investments in India for a specified period of time. Participation through this route is entirely voluntary. The RBI had doubled the cap on investments through this route to ₹1.5 lakh crore from ₹75,000 crore, made these quotas available on tap, and allowed FPIs to buy debt exchange-traded funds.

While FPIs routed ₹25,225 crore and ₹32,886 crore in 2020 and 2021, respectively, the numbers started dipping last year, with only ₹3,791 crore in 2022.

Unlike India’s equity market, which has managed to attract sovereign wealth funds, pension funds, and other categories of stable, long-term foreign investors in the past decade, the debt market continues to draw in sizeable hot money.

This high variability of inbound FPI flows seems to arise from the fact that a good proportion of foreign investors who are presently betting on Indian bonds merely view them as a short-term arbitrage opportunity on global interest rate differentials — borrowing money at rock-bottom rates back home and deploying it at higher rates here.

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