Effect of VRR on the Indian Currency

Effect of VRR on the Indian Currency

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The Reserve Bank of India (RBI) created the VRR or, the Voluntary Retention Route to make it possible for FPIs to invest within India's debt markets. The Reserve Bank of India introduced VRR in March 2019 as a separate channel to allow FPIs to invest in India's debt markets while the Indian Rupee was depreciating against the US dollar. The macro-prudential and other regulatory requirements that apply to FPI investments in debt markets do not apply to any of the investments made through this channel. FPIs, on the other hand, are required to voluntarily agree to keep at least a certain percentage of their investments in India for any time period they choose.

The primary objective of the Voluntary Retention Route (VRR) is to provide FPIs with operational flexibility to manage their investments while simultaneously attracting stable, long-term investments in India's debt markets. This means of investing is open to any FPI registered with SEBI. The investors' VRR investments are exempt from macro-prudential and other regulatory requirements. These only apply to investments made by FPIs in India's debt markets. However, the central bank has decided that the time limit is three years. Currently, this investment only lasts for a minimum of three years, or until the Reserve Bank of India decides otherwise for each auction.

The VRR has enhanced the FPI investment limit from the previous INR 75,000 crore to INR 1,50,000 crore. First-come, first-served principles will govern the distribution of investments made through this channel. The following are some wa The VRR has enhanced the FPI investment limit from the previous INR 75,000 crore to INR 1,50,000 crore. First-come, first-served principles will govern the distribution of investments made through this channel. The following are some ways that the VRR affects Indian currency:

1. The Indian rupee will strengthen against the US dollar as the FPI inflow increases because there will be more money in the Indian economy.

2. The more foreign direct investment that leaves the country, the fewer dollars there are in the Indian economy, which causes the rupee to weaken versus the dollar.

In conclusion, VRR is a distinct conduit that draws reliable, long-term FPI investments to India's debt markets.