20% LIMIT ON INVESTMENTS BY FPIS IN CORPORATE BONDS LIFTED BY RBI
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The Reserve Bank of India (RBI) has withdrawn the earlier order which stipulated a 20% limit on investments by FPIs in Corporate Bonds.
- 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.
- 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.