Reserve Bank of India’s Notification on Limits for Investments in Debt and Sale of Credit Default Swaps by Foreign Portfolio Investors

Introduction

In a recent circular issued by the Reserve Bank of India on 26th April, 2024 titled “Limits for Investments in debt and sale of Credit Default Swaps by Foreign Portfolio Investors”, the Central Bank has notified the limits for investments in the Financial Year 2024 – 2025 pertaining to debt and selling of Default Swaps of credits by the Foreign Portfolio Investors (FPIs). The term “Credit Default Swaps” refers to a bilateral agreement wherein the first party undertakes a purchase of protection from the other party against the incurred loss from default of a borrower for a stipulated period of time.

According to the amendments in the investments limits for the financial year 2024 – 2025 as per the circular, the limits pertaining to the Foreign Portfolio Investments in Governmental Securities (G – Secs), State Government Securities (SGSs) and corporate bonds have been left unaltered and are fixed at their previous rates which were 6%, 2% and 15% respectively.

Additionally, as per the previous A.P circular dated 30th March, 2020; all the investments in the

‘specified securities’ by the eligible investors shall be routed and remain accessible through the Fully Accessible Routes or FAR. Moreover, the incremental charges in the governmental securities have been divided into two sub – categories namely “General” and “Long Term” and shall be retained at a 50:50 ratio for 2024 – 2025.

The revised limits in absolute terms have also been amended as per the circular and in terms of Circular No. 23 dated February 10, 2022; the notional amount of Credit Default Swaps sold by the Foreign Portfolio Investors and its aggregate limit has been set at 5% of the outstanding stocks of the corporate bonds by the Reserve Bank. Keeping in mind the above provisions, an additional limit of Rs. 2,54,500/- Crores has also been set out for the current Financial Year i.e., 2024 – 2025.

Conclusion

The circular notification of the RBI is instrumental in adapting to the needs of the Indian financial market and making necessary alterations in tune of the current financial, fiscal and monetary setup of the country.

Through this step, the Reserve Bank has also made an attempt to secure the financial markets of the country to attract individuals and entities to invest in the country and regulate the framework of the country at large.