RBI Fine Tunes FPI Regime For Debt Investments

Introduction

On May 8, 2025, the Reserve Bank of India (RBI) issued a circular¹ (Refer Annexure A) removing two regulatory caps on foreign portfolio investment (FPI) in corporate debt: the 30% short-term investment limit and the 15% concentration limit.

So far, FPIs using the general investment route had to ensure that no more than 30% of their corporate debt holdings were in securities with residual maturity up to one year, and a single FPI (including related FPIs) could not exceed 15% of the overall FPI corporate debt limit (10% for certain long-term FPIs). RBI has now withdrawn both these conditions for FPI debt investments via the general route. We examine the implications of both below.

Short-Term Debt Investments By FPIs: The Regulatory Journey

RBI has progressively reshaped its regulatory stance on FPIs in short-term corporate debt over the past decade, balancing market development with financial stability.

In February 2015, RBI² , in coordination with SEBI³ , imposed a significant restriction: FPIs were barred from investing in corporate debt instruments with a residual maturity of less than three years. This move aimed to curb volatile hot money flows and promote longer-term, stable capital. By April 2018⁴ , in response to declining FPI inflows, RBI eased the minimum residual maturity requirement from three years to one year but within two months it introduced the restrictions for “short-term investments” – defined as investments with residual maturity up to one year. The condition stated that short-term investments in corporate bonds by an FPI shall not exceed 20% of the total investment of that FPI in corporate bonds. The cap was revised upwards to 30% in January 2020.⁵

In July 2022⁶ , against the backdrop of global monetary tightening and capital outflows from emerging markets, RBI temporarily relaxed the short-term investment restrictions to support the domestic debt market. For a specified window (July 8, 2022 through October 31, 2022), FPIs were allowed to invest in short-term instruments – commercial paper and short-term NCDs with original maturity up to 1 year. These investments were also exempted from the 30% short term investment cap until their maturity/sale. These measures, announced as part of a package to enhance forex inflows⁷, provided a short-term “free pass” to FPIs, enabling them to park funds in money-market debt without violating regulatory limits. While this was a temporary tweak, it underscored the RBI’s readiness to loosen restrictions in response to market conditions.

Fast forward to now: What’s the latest change?

This month, RBI removed the 30% short-term investment cap. FPIs are no longer constrained by how much of their portfolio can be in sub-one-year instruments.

This regulatory tweak is not a broad-based liberalization of eligible investments. FPIs continue to be barred from investing in corporate debt securities with original/residual maturity under one year.⁸ In other words, it simply allows them more flexibility in how they manage longer-term bonds as they approach maturity. For instance, a five-year bond in an FPI’s portfolio would, in its final year, count towards the short-term bucket. If too many bonds fell into that bucket, the FPI would risk breaching the 30% limit.

By eliminating the short-term cap, RBI has addressed two key challenges faced by FPIs: forced diversification and forced selling. The short-term investment limit acted as a form of regulatorydriven, forced diversification compelling FPIs to purchase additional longer-term securities simply to keep their short-term holdings below the 30% threshold. This often proved difficult, as FPIs typically negotiate directly with issuers with the intent of holding bonds until maturity. On the other hand, in cases where diversification options were limited, FPIs faced the prospect of forced selling. However, selling to other FPIs was not an option, as they too were restricted from holding securities with less than one year to maturity. Resultantly, FPIs were often forced to sell prematurely to domestic investors, solely to remain compliant.

That said, in our experience, RBI had not aggressively enforced or penalized cases of noncompliance, perhaps acknowledging the practical complexities. Now, with the 30% cap gone, FPIs can hold these bonds right until they mature, without worrying about breaching any limit.

Concentration Limit Removed

As a second change, RBI has removed the provision that mandated a 15% concentration limit –

“Concentration limit: Investment in corporate debt securities by an FPI (including its related FPIs) shall not exceed 15 per cent of prevailing investment limit for these securities in case of long-term FPIs and 10 per cent of prevailing investment limit for other FPIs.”

The change needs to be examined in the context of FPI corporate bond market limit that is already large and underutilized. In its circular last month, RBI set⁹ the FPI investment ceiling in corporate bonds at INR 8.22 lakh crore for April – September 2025 and INR 8.80 lakh crore for October – March 2026. Notably, actual FPI investment under this general route is only a fraction¹⁰ of the allowed headroom.

Conclusion

RBI’s latest move on FPI corporate debt must be viewed as regulatory fine-tuning rather than a paradigm shift. It streamlines the FPI investment process and removes an irritant that forced needless turnover of investments, which is undoubtedly positive for market participants. However, it stops well short of any bold liberalization. The core philosophy of India’s FPI debt policy – to favor longer-duration, stable investments over short-term inflows – remains intact.

Annexure A

Investments by Foreign Portfolio Investors in Corporate Debt Securities through the General Route – Relaxations

Attention of Authorised Dealer Category-I (AD Category-I) banks is invited 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 Master Direction - Reserve Bank of India (Non-resident Investment in Debt Instruments) Directions, 2025 dated January 07, 2025 [hereinafter, ‘Master Direction’].

2. At present, investments by Foreign Portfolio Investors (FPIs) in corporate debt securities through the General Route are subject to the short-term investment limit and the concentration limit as prescribed in paragraphs 4.4(iii) and 4.4(v) of the Master Direction, respectively. On a review, and with a view to providing greater ease of investment to FPIs, it has been decided to withdraw the requirement for investments by FPIs in corporate debt securities to comply with the short-term investment limit and the concentration limit.

3. The directions in this circular are issued with immediate effect.

4. The updated Master Direction is enclosed herewith.

5. AD Category-I banks may bring the contents of these directions to the notice of their constituents.

6. 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.

¹ RBI, Investments by Foreign Portfolio Investors in Corporate Debt Securities through the General Route – Relaxations.
² RBI, Foreign investment in India by Foreign Portfolio Investors.
³ SEBI, Change in investment conditions / restrictions for FPI investments in Corporate Debt securities, CIR/IMD/FIIC/1/2015.
⁴ RBI, Investment by Foreign Portfolio Investors (FPI) in Debt – Review.
⁵ RBI, Investment by Foreign Portfolio Investors (FPI) in Debt.
⁶ RBI, Investment by Foreign Portfolio Investors (FPI) in Debt – Relaxations.
⁷ RBI, Liberalization of Forex Flows, Press Release 2022-2023/481 (Reserve Bank of India - Press Releases).
⁸ Master Direction – Reserve Bank of India (Non-resident Investment in Debt Instruments) Directions, 2025: Para 4.4 (i) “Minimum residual maturity requirement: An FPI may invest only in corporate debt securities with original/residual maturity of above one year”.
⁹ RBI, Limits for investment in debt and sale of Credit Default Swaps by Foreign Portfolio Investors (FPIs).
¹⁰ NSDL, Latest (Daily Trends in FPI Investments). NSDL FPI Monitor, (May15, 2025).