In a significant move to liberalize foreign investment, RBI Governor Sanjay Malhotra announced on February 6, 2026, that the central bank is scrapping the ₹2.5 lakh crore ($27.7 billion) overall investment limit under the Voluntary Retention Route (VRR).
This decision is part of a broader push to deepen the Indian corporate bond market and attract more stable, long-term foreign capital.
1. What is the Voluntary Retention Route (VRR)?
The VRR was introduced in 2019 as a separate channel to attract Foreign Portfolio Investors (FPIs) to the Indian debt market.
- The “Give-and-Take”: In exchange for committing to stay invested in India for a minimum of three years, FPIs are exempt from several regulatory restrictions that usually apply to the “General Route,” such as concentration limits or minimum residual maturity requirements.
- The Benefit: It allows large institutional investors to hold significant portions of a single bond issuance, making it easier to manage large-scale debt portfolios.
2. Why Remove the Cap Now?
The removal of the ₹2.5 lakh crore ceiling reflects a maturing debt market and changing global dynamics.
- Shift to Global Indices: Since the inclusion of Indian government bonds in major global indices (like J.P. Morgan’s GBI-EM) in 2024-25, the reliance on the VRR window has naturally decreased.
- Prudential Safeguards: While the overall ₹2.5L crore cap is gone, the RBI clarified that investments under VRR will still be subject to the sectoral ceilings applicable under the General Route. This ensures that while there is more “room” for investors, the total foreign exposure to the Indian economy remains within safe limits.
- Stable Participation: By lifting the limit, the RBI aims to encourage “sticky” foreign participation, where investors are incentivized to remain committed to India’s growth story for at least three years, rather than engaging in short-term speculative trades.
3. Accompanying Corporate Bond Reforms
The cap removal was part of a suite of measures announced during the February 2026 MPC meet to modernize the debt market:
- Total Return Swaps (TRS): In line with the Union Budget 2026-27, the RBI will introduce a framework for Total Return Swaps on corporate bonds, allowing investors to gain economic exposure without owning the underlying asset.
- Credit Index Derivatives: A new regulatory framework will enable derivatives linked to corporate bond indices, providing better risk-management tools for large debt holders.
- ECB Liberalization: The RBI also finalized norms to further liberalize External Commercial Borrowing (ECB), making it easier for Indian corporations to raise debt from overseas.
4. Market Impact
The move is expected to primarily benefit large global pension funds and sovereign wealth funds that prefer the flexibility and scale the VRR provides.
- Liquidity: Analysts expect a gradual increase in secondary market liquidity for high-quality corporate bonds (AAA and AA+ rated).
- Pricing Efficiency: With more foreign participation, the “yield spread” between government securities and corporate bonds is expected to narrow, lowering the cost of borrowing for Indian firms.
Conclusion: A “General Route” Alignment
The scrapping of the VRR cap effectively integrates the route more closely with India’s general debt market framework while preserving its core “lock-in” benefit. For the RBI, it is a vote of confidence that India’s macro-stability is strong enough to handle uncapped, yet regulated, long-term foreign debt inflows.
