- INTRODUCTION
The Reserve Bank of India (“RBI”) on January 7th, 2025, issued the Master Direction titled ‘Reserve Bank of India (Non-resident investment in Debt Instruments) Directions, 2025 (“MD-Debt Instrument”)1. This notification aimed to consolidate and update the framework for non-resident investment in debt instruments in India, and streamlined the working of debt instruments, enabling a transparent environment. This direction supersedes all the prior notifications and circulars, incorporating amendments into the present regulatory functioning.
This article attempts to understand the key elements of the MD-Debt Instrument reflecting the prior mechanism, changes incorporated and the ramifications which will likely flow from the changes introduced.
- OBJECTIVE OF THE NOTIFICATION
RBI’s attempt with the master direction was to provide for a coherent and unified regulatory mechanism for non-resident investment in debt instruments. By consolidating the disparate regulations, the RBI seeks to simplify the compliance, enhancing greater participation from foreign investors, ensuring that all the transactions by eligible non-residents in debt instruments are catered to.
Under the framework of the direction, the RBI categorises the investments into four main channels, namely the general route, the voluntary retention route (“VRR”), fully accessible route (“FAR”), sovereign green bonds2, each providing for greater flexibility to the Foreign Portfolio Investments (“FPIs”), allowing them to choose the investment routes based on their risk appetite and retention preferences.
- WHAT EXISTED EARLIER
Before the issuance of this directions, non-resident investment in debt instruments were governed by circulars and notifications issued under the Foreign Exchange Management Act (FEMA), 19993 and the RBI Act, 19344. This majorly included:
- The Foreign Exchange Management (Permissible Capital Accounts Transactions) Regulations, 20005.
- Foreign Exchange Management (Borrowing and Lending) Regulations, 20186.
- Foreign Exchange Management (Debt Instruments) Regulation, 20197
These regulations were corresponded with other circulars and aspects of non-resident investment, including but not limited to eligible instruments and operational guidelines, however, the fragmented nature of those directives often posed as a challenge, which the present master directives supplanted.
Under the present framework, RBI has amalgamated all the notifications and expanded the definition with respect to the investment channels, allowing the streamlining of the investment routes as follows:
| Sr. No. | Route of Investment | Eligible Instruments | Investment Limits | Investments Other |
| General Route | Applicable to FPIs; and includes: Central Government Securities (including Treasury Bills), other than included as ‘specified securities’ under the Fully Accessible Route.State Government securities.Corporate debt securities | Central Government: 6% of outstanding stock. State Government: 2% of outstanding stock. Corporate debt securities: 15% of outstanding stock. | Government Securities Maturity Requirement: FPIs can invest in securities without any minimum residual maturity requirement. Short-term: Max 30% of investments in securities with up to 1-year maturity (exceptions: investments before Apr 27, 2018, or Jul 8–Oct 31, 2022). Security-wise Limit: Max. 30% of outstanding stock in any Central Government Security. Concentration: Max. 15% of limits for long-term FPIs, 10% for other prevailing investment limits for other FPIs. Corporate Debt Securities Maturity: Min. original/ residual maturity> 1 year. Short-term Limit: Max. Max. 30% of investments in corporate debt with up to 1-year maturity (exceptions: same as Govt. securities). Issue Cap: Max 50% per corporate debt issue. Concentration: Max. 15% for long-term FPIs, 10% for others. | |
| Voluntary Retention Route (“VRR”) | Applicable to FPIs, this includes: Eligible Investment: Instruments under Schedule 1 of FEMA (Debt Instruments) Regulation, 2019, excluding domestic mutual funds or exchange traded fund (“ETF”) investing < 50% in equity. ETF: Only debt-focused ETFs allowed. Repos/ Reverse Repos: Permitted up to 10% of VRR investment. Restriction: No investment in real estate, capital market, or land purchase.To be Listed Corporate Debt: Investment Allowed. | Overall Limit: INR 2,50,000 crore (Indian Rupees Two Lakh Fifty Thousand Crore only) or higher, as notified RBI. Allocation: First-come, first served or auction-based allocation.; max. 50 % allocation for any FPI (including related FPIs) in case of oversubscription. | Investment Requirement: Commitment: 75% of committed portfolio size (“CPS”) to be invested within 3 months of allotment. Maintenance: 75% of CPS level must be maintained during retention period. Retention Period: Minimum retention period is 3 years or as announced by RBI, and it commences from the date of limit allotment, or when 75% of the CPS is invested, if additional time was taken for investment. Flexibility: Investment through VRR are not subject to minimum residual maturity, short-term limits, or issue-wise limits Exit Option: FPIs may at the end of the retention period, may opt for: Liquidate its portfolio and exit; or Shift its investment to the General Route, based on the availability of limit under the General Route.; or Or continue to hold its investment until maturity or sale. Continue its investment for an additional identical retention period. | |
| Fully Accessible Route (“FAR”) | Applicable to FPIs, non-resident Indians, overseas citizen of India, and other person resident outside India. This includes all previous securities which were included in FAR as per the previous notification, along with new issuance of 5-years, 7-years and 10-years tenors. | FPI investment in these specified securities under this route is not subject to any investment limits or controls appliable under the General route. Limited to specific government securities notified under this route. | This unrestricted access provides access to certain sovereign bonds, attracting global investors. | |
| Sovereign Green Bonds | Eligible to investors in the International Financial Services Centre (“IFSC”) | Limited to trading and settlement within IFSC framework. | This route focuses on environmentally sustainable investments, aligning with global ESG standards. |
- RAMIFICATIONS OF THE NOTIFICATION
The unified framework and streamlined process is expected to enhance the ease of doing business in India, allowing channels of investments for greater flexibility and incentives for long-term growth. Thus, vide this master direction, the non-resident investors undertake transactions in foreign exchange, interest rate, and credit derivates. At the same time, the FPIs are provided with a leeway to participate in both the primary and the secondary markets for government securities. With the increased flexibility in place, this allows the investors to choose routes based on the risk and retention capacity, while strengthening accountability and reduces the risk of non-compliance. Further, with the reduction of ambiguities, this notification fosters for greater investor confidence, enhancing the inflow of capital into the country, strengthening the credibility of the Indian Markets.
Hence RBI’s attempt to consolidate and modernising the regulatory framework is a step in right direction, paving the way for greater foreign participation and alignment of the best practices. With the inclusion of sustainability and an array of investment routes, this particularly will impact on the market dynamics and foreign investment trends in India.
[1] Master Direction- Reserve Bank of India (Non-resident Investment in Debt Instruments) Directions, 2025
[2] Refer to Clause 3 of the MD-Debt Instruments.
[3] Foreign Exchange Management Act (FEMA), 1999 (Act 42 of 1999).
[4] Reserve Bank of India Act, 1934 (Act 2 of 1934).
[5] Foreign Exchange Management (Permissible capital account transactions) Regulation, 2000
[6] Foreign Exchange Management (Borrowing and Lending) Regulations, 2018
[7] Foreign Exchange Management (Debt Instruments) Regulation, 2019
