GS 3: Economy

Why in News?

The Reserve Bank of India (RBI) has withdrawn the earlier order which stipulated a 20% limit on investments by FPIs in Corporate Bonds.

Highlights:

• 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.

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.