Mains Paper 3: Economy | Mobilization of resources
From the UPSC perspective, the following things are important:
Prelims level: FDI, FPI, VRR
Mains level: Liquidity management policy in India
- The RBI’s decision to infuse rupee liquidity through long term foreign exchange swap, a first of its kind in liquidity management policy, is likely to boost investments by foreign portfolio investors under the voluntary retention route (VRR).
Voluntary Retention Route (VRR)
- RBI had announced a separate scheme called VRR to encourage Foreign Portfolio Investors (FPIs) to undertake long-term investments in Indian debt markets.
- Under this scheme, FPIs have been given greater operational flexibility in terms of instrument choices besides exemptions from certain regulatory requirements.
- The details are as under:
- The aggregate investment limit shall be ₹ 40,000 crores for VRR-Govt and ₹ 35,000 crores for VRR-Corp.
- The minimum retention period shall be three years. During this period, FPIs shall maintain a minimum of 75% of the allocated amount in India.
- Investment limits shall be available on tap for investments and shall be allotted by Clearing Corporation of India Ltd. (CCIL) on ‘first come first served’ basis.
Benefits of VRR
- The RBI will conduct dollar-rupee buy/sell swap action of $5 billion for a three-year tenor.
- Such a swap route has been explored by various emerging market economies as an effective tool to manage liquidity.
- Apart from liquidity infusion, the move will boost the country’s foreign exchange reserves and is likely to support the exchange rate.
FDI and FPI