A study on Master Direction- Reserve Bank of India (RBI) (Non-resident Investment in Debt Instruments) Directions, 2025

Introduction

On January 7, 2025, the Reserve Bank of India (RBI) issued the Master Direction – Reserve Bank of India (Non-Resident Investment in Debt Instruments) Directions, 2025. This directive consolidates and updates the framework governing how Foreign Portfolio Investors (FPIs) and other non-residents and overseas citizens of the country can participate in India’s debt market, replacing previous regulations, including the Foreign Exchange Management (Debt Instruments) Regulations, 2019.

This move seems to be a part of India’s broader strategy to increase foreign participation in its bond markets while ensuring financial stability.

Major Takeaways

The RBI has introduced various avenues for non-residents to invest in Indian debt instruments. These include the General Route, the Voluntary Retention Route (VRR), the Fully Accessible Route (FAR), and the Sovereign Green Bonds framework.

• General Route

Non-residents can continue investing in government and corporate debt securities under this route, adhering to predefined limits. The framework specifies the following caps for Foreign Portfolio Investors (FPIs):

1. 6% of the outstanding stock of Central Government securities
2. 2% of the outstanding stock of State Government securities
3. 15% of the outstanding stock of corporate bonds
4. Restrictions on short-term investments, with a cap on securities with less than a one-year maturity.

• Voluntary Retention Route (VRR)

The VRR facilitates investment in Indian debt instruments, requiring FPIs to retain their holdings for a minimum of three years. The RBI has allocated ₹2.5 lakh crore for investments under this route, with allotments conducted either through an auction process or on a first come, first served basis.

• Fully Accessible Route (FAR)

The FAR allows non-residents to invest in specified government securities without any investment restrictions or limits. This framework creates a favourable environment for foreign investors, particularly in new issuances of government bonds with maturities of 5, 7, and 10 years.

• Sovereign Green Bonds

In line with global sustainability initiatives, the RBI has introduced a framework for the trading and settlement of Sovereign Green Bonds. These bonds, eligible for investment through India’s International Financial Services Centre (IFSC), present a compelling opportunity for long-term sustainable investments in the Indian market.

A Progressive Step Towards Market Liberalization

The Reserve Bank of India’s (RBI) newly introduced guidelines reflect a carefully designed approach aimed at liberalizing India’s debt market while ensuring a delicate balance between attracting foreign investment and maintaining overall financial stability.

One of the most significant steps in this direction is the removal of constraints under the Fully Accessible Route (FAR), which allows foreign investors to participate more freely in India’s bond market.

Despite these positive changes, the short-term investment cap of 30% imposed on Foreign Portfolio Investors (FPIs) remains a potential deterrent for certain global investors seeking quick gains.

Conclusion

The Reserve Bank of India (RBI) has been proactively implementing measures to simplify regulatory policies and enhance transparency within the financial system. These initiatives are expected to significantly boost foreign investment by creating a more predictable and investor-friendly business environment. Furthermore, the central bank’s emphasis on establishing a regulatory framework rooted in trust, clarity, and stability is playing a crucial role in strengthening India’s credibility as a dependable and attractive destination for foreign capital. As a result, these comprehensive reforms are not only fostering confidence among international investors but also positioning India as a rising force in the global financial ecosystem.