Voluntary Retention Route Scheme of RBI

Voluntary Retention Route Scheme of RBI

The RBI's decision to infuse rupee liquidity through long term foreign exchange swap, a first of it's its kind in liquidity management policy, is likely to boost investments by foreign portfolio investors under the voluntary Retention Route (VRR).

Voluntary Retention Route:

• 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 RS. 40,000 crore for VRR-govt and 35,000 crore 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 allocated by clearing corporation of India LTD. 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.