RBI Eases Norms For Foreign Investors To Invest In Corporate Bonds

With the objective of improving foreign investment in the Indian corporate bond market, the Reserve Bank of India (RBI) has made public the withdrawal with immediate effect of two important investment prohibitions on foreign portfolio investors (FPIs). The policy, made in a circular released on May 8, 2025, eliminates the limitation on short-term investment and concentration limit for FPIs buying corporate debt securities under the general route.

This measure is part of a larger initiative to open up the Indian debt market and attract more international investors, as India attempts to tap more stable long-term capital flows and better market liquidity.

Knowing the Withdrawn Limits

So far, FPIs investing in corporate bonds under the general route were subject to two significant ceilings under the RBI’s Master Direction on Non-resident Investment in Debt Instruments.

The first was the limit on short-term investments, which prevented FPIs from making investments in securities with residual maturity of less than one year on more than half of their aggregate investments in corporate bonds. The second was the concentration limit, which did not allow a single FPI to invest more than 50 percent of any given corporate bond issue.

By lifting such restrictions, the RBI has provided the entry for more flexible FPI investment, particularly in the shorter-term debt market, which generally carries larger yields and liquidity. This is likely to increase the FPI participation as well as bring Indian companies access to more diversified sources of funding.

A Timing Aligning with Macroeconomic Requirement

The relaxation of restrictions comes at a time when India’s corporate bond market is underutilised compared to its potential.

Based on figures from the Securities and Exchange Board of India (Sebi), outstanding corporate bonds as of December 2024 were approximately Rs 90 lakh crore rupees, which is less than 16 per cent of the country’s gross domestic product (GDP). In comparison, the corporate bond market for developed markets such as the United States comprises over 40 per cent of the GDP.

The RBI has been pushing for enhanced depth and liquidity in the domestic bond market, and pulling in foreign capital is an important component of that strategy. Further, India’s recent addition to global bond indices, including the JP Morgan Emerging Markets Bond Index, has heightened international investor interest in Indian debt. Easing FPI norms is a progression of this spill over.

Implications for Bond Market and Economy

The new action will enhance the demand for corporate bonds, especially in the shorter tenure segment. This will reduce the cost of borrowing for businesses, especially those with good creditworthiness, and enhance availability of funds for infrastructure and capital spending projects.

More participation by FPIs can also increase market efficiency, raise volumes, and promote price discovery. This can lead to reduced spreads and improved returns for domestic participants, such as mutual funds, pension funds, and insurance companies, too, who participate in the bond market.

Nevertheless, more short-term foreign investment could also increase the threat of volatility, particularly in times of global financial turmoil. Therefore, balance between stability and openness is still essential.

The RBI’s decision was issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (FEMA 1999), and the circular has been addressed to all Authorised Dealer Category-I banks, who are now expected to inform their constituents and operationalise the new norms immediately.

Such regulatory clarity and lifting of the caps is also likely to enhance investor sentiment. For instance, earlier, a lot of FPIs were held back by the short-term investment limit while creating their portfolios. With the new freedom to invest along the yield curve, including shorter-dated bonds, portfolio managers might increase allocation to India.

What it Means for Retail Investors?

Though the shift impacts FPIs squarely, the domino effect can reach retail investors indirectly. Greater involvement of FPIs in corporate debt can trigger greater issuance and a more developed secondary market. This can enhance liquidity for debt mutual funds that have investments in corporate bonds with shorter maturities. This can also lead to better returns for debt funds over a period, which constitute an important component of most Indian family investment portfolios.

Also, more predictable and stable corporate bond yields would make such an instrument a better choice for fixed-income planning, especially for conservative investors and retirees.

Are More Reforms on the Way?

This change in policy is one step towards a longer-term path of merging Indian capital markets with international systems. Both RBI and Sebi have been easing foreign investor access over time, such as with the introduction of the Voluntary Retention Route (VRR) previously, and more recently the permission for partial direct listing of Indian companies abroad.

With India expected to be one of the fastest-growing major economies in the next decade, capital market reforms like this one are a crucial component in mobilising both local and foreign resources efficiently.