Bonds, rupee rally on reports RBI proposes to tweak foreign debt limits

MUMBAI (Reuters) - Bonds and rupee rallied on Friday on media reports the central bank had proposed to set the limit for foreign investments for government debt in rupees instead of dollars, effectively allowing increased purchases from overseas.

NewsRise Financial and other media outlets reported about the Reserve Bank of India proposal issued to the government, citing an unidentified finance ministry official.

The official was quoted as saying such a step could effectively increase debt limits by another 370 billion rupees ($5.8 billion), and that the government would consider the proposal.

India's current debt limits of $25 billion for government bonds is fully utilised. The country has also set aside another $5 billion for long-term foreign investors such as sovereign wealth funds, pension, insurance funds and central banks.

The Indian rupee extended gains on the day, rising for a third consecutive session. It was trading at 63.61 to the dollar at 3:40 p.m. (1010 GMT), after earlier hitting as high as 63.55, its strongest since May 25.

The currency closed at 63.73/74 on Thursday.

The most traded 10-year bond yield fell as much as 9 basis points to 7.86 percent, its lowest since June 2. It was last trading at 7.88 percent, compared with its Thursday's close of 7.95 percent.

To allow the increased limits, the average conversion rate for the overall $25 billion limit in government debt could be around 49.8 rupees and at 58.3 rupees for the $5 billion allocated to long-term investors, according to one trader, below current levels of near 64 to the dollar.

"Limits are full in government bonds and there is a big demand from FIIs (foreign institutional investors). The RBI was not in favour of increasing the limit so re-setting looks to be a good option," said a dealer at a foreign bank.

(Reporting by Suvashree Dey Choudhury; Editing by Anand Basu)