The Reserve Bank of India (RBI) recently issued Circular No. 03 of 2024, focusing on investment limits for Foreign Portfolio Investors (FPIs) in debt instruments and regulations regarding Credit Default Swaps (CDS). This article delves into the key highlights and implications of the circular.
Detailed Analysis
1. Investment Limits for 2024-25: The circular outlines the investment limits for FPIs in various debt instruments for the financial year 2024-25. Notable mentions include unchanged limits for government securities (g-secs), state government securities (SGSs), and corporate bonds.
2. Fully Accessible Route (FAR): Investments in ‘specified securities’ are to be considered under the Fully Accessible Route, ensuring ease of investment for eligible investors as per previous directives.
3. Allocation of Incremental Changes: The circular maintains the allocation ratio of incremental changes in the g-sec limit between ‘General’ and ‘Long-term’ categories at 50:50 for the fiscal year.
4. Revised Limits: A detailed table presents the revised investment limits for different categories, providing clarity on the limits for each period of the financial year.
5. Credit Default Swaps (CDS): The circular imposes guidelines regarding CDS, restricting the aggregate limit of the notional amount of CDS sold by FPIs to 5% of the outstanding stock of corporate bonds, with a specific additional limit for the year 2024-25.
6. Compliance and Communication: AD Category – I banks are instructed to communicate the contents of the circular to their constituents and customers, ensuring widespread awareness and compliance.
Conclusion
The RBI’s Circular No. 03 of 2024 plays a crucial role in regulating FPI investments in debt instruments and ensuring market stability. By providing clear guidelines on investment limits and CDS regulations, the circular aims to foster transparency and compliance within the financial ecosystem. It underscores the RBI’s commitment to effective monetary regulation and prudent risk management in the evolving financial landscape. Stakeholders, particularly FPIs and AD Category – I banks, must adhere to the directives outlined in the circular to navigate the regulatory landscape effectively and contribute to a robust and resilient financial market.
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Reserve Bank of India
RBI/2024-25/27
A.P. (DIR Series) Circular No. 03
April 26, 2024
To,
All Authorized Persons
Madam / Sir
Limits for investment in debt and sale of Credit Default Swaps by Foreign Portfolio Investors (FPIs)
Attention of Authorised Dealer Category-I (AD Category-I) banks is invited to Schedule 1 to the Foreign Exchange Management (Debt Instruments) Regulations, 2019 notified vide Notification No. FEMA. 396/2019-RB dated October 17, 2019 as amended from time to time and the relevant Directions issued thereunder.
2. Reference is also invited to the following directions issued by the Reserve Bank:
a. A. P. (DIR Series) Circular No. 25 dated March 30, 2020;
b. Circular No. FMRD.FMSD.No.25/14.01.006/2019-20 dated March 30, 2020;
c. A. P. (DIR Series) Circular No. 23 dated February 10, 2022;
d. A. P. (DIR Series) Circular No. 01 dated April 19, 2022;
e. Circular no. FMRD.FMID.No.04/14.01.006/2022-23 dated July 07, 2022;
f. Circular no. FMRD.FMID.No. 07/14.01.006/2022-23 dated January 23, 2023; and
g. Circular no. FMRD.FMID.No. 04/14.01.006/2023-24 dated November 08, 2023;
3. Investment Limits for the financial year 2024-25:
a. The limits for FPI investment in government securities (g-secs), state government securities (SGSs) and corporate bonds shall remain unchanged at 6 per cent, 2 per cent and 15 per cent respectively, of the outstanding stocks of securities for 2024-25.
b. As hitherto, all investments by eligible investors in the ‘specified securities’ shall be reckoned under the Fully Accessible Route (FAR) in terms of A. P. (DIR Series) Circular No. 25 dated March 30, 2020.
c. The allocation of incremental changes in the g-sec limit (in absolute terms) over the two sub-categories – ‘General’ and ‘Long-term’ – shall be retained at 50:50 for 2024-25.
d. The entire increase in limits for SGSs (in absolute terms) has been added to the ‘General’ sub-category of SGSs.
4. The revised limits (in absolute terms) for the different categories, are in Table 1:
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Table 1: Investment limits for 2024-25 |
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| all figures in ₹ Crore | ||||||
| G-Sec General | G-Sec Long Term | SGS General | SGS Long Term | Corporate Bonds | Total Debt | |
| Current FPI limits | 2,67,890 | 1,36,890 | 92,828 | 7,100 | 6,67,871 | 11,72,578 |
| Revised limit for the HY Apr 2024-Sept 2024 | 2,68,437 | 1,37,437 | 1,05,290 | 7,100 | 7,15,687 | 12,33,951 |
| Revised limit for the HY Oct 2024-Mar 2025 | 2,68,984 | 1,37,984 | 1,17,752 | 7,100 | 7,63,503 | 12,95,322 |
5. In terms of A.P. (DIR Series) Circular No. 23 dated February 10, 2022, the aggregate limit of the notional amount of Credit Default Swaps sold by FPIs shall be 5 per cent of the outstanding stock of corporate bonds. Accordingly, an additional limit of ₹2,54,500 crore is set out for 2024-25.
6. AD Category – I banks may bring the contents of this circular to the notice of their constituents and customers concerned.
7. The Directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) without prejudice to permissions/approval, if any, required under any other law.
Yours faithfully
(Dimple Bhandia)
Chief General Manager
