India's RBI caps Credit Default Swap sales at 5% and sets 2026-27 debt limits
FPI treasuries must treat Voluntary Retention Route holdings as General Route from Apr 1
Change
India's RBI set FY2026-27 investment ceilings for Foreign Portfolio Investors (FPIs) in government securities, state government securities and corporate bonds at 6%, 2% and 15% of outstanding stock respectively; it made all Voluntary Retention Route investments count under the General Route from April 1, 2026, and capped aggregate notional sales of Credit Default Swaps (CDS) by FPIs at 5% (₹3,30,464 crore).
Why it matters
Treating Voluntary Retention Route holdings as part of the General Route removes separate headroom and forces debt allocations to fit within a single ceiling, increasing the likelihood of limit breaches for unconstrained positions. The 5% cap on CDS notional reduces the maximum hedging volume available to managers using swaps against corporate bond exposure.
Implications
- — Portfolio managers at Foreign Portfolio Investors (FPIs) — must reduce or reallocate Indian debt positions before April 1, 2026 — otherwise Voluntary Retention Route holdings will count against the General Route ceiling and risk breaching FPI investment limits, triggering forced sell‑downs or compliance action.
- — Trading desks at FPIs that sell Credit Default Swaps (CDS) — must ensure aggregate CDS notional remains below the 5% cap immediately — otherwise excess notional will breach RBI limits and may be rejected or subject to regulatory enforcement.
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