Govt ready to alter cap on foreigners' debt holdings - official

NEW DELHI/MUMBAI (Reuters) - The government has no objection to setting the limit for foreign investment in debt markets in rupees instead of dollars, a senior finance ministry official said, a move that would effectively allow increased purchases from overseas.

Last week Raghuram Rajan, the central bank governor, said India would steadily increase the foreign debt limits but would proceed cautiously.

Although the government has final say on decisions involving debt limits for foreign investors, the Reserve Bank of India has wide input and decides on how the rules are implemented.

At current exchange rates, setting limits in rupees would effectively increase them by 370 billion rupees ($5.82 billion), given the weakening trend in the domestic currency.

India's current limit of $25 billion for ownership of government bonds by foreign institutional investors (FIIs) is fully utilised. The country has also set aside another $5 billion for long-term foreign investors.

"The government has no problem if FIIs' investment in government securities is considered in rupee terms," the official said.

A second policy maker familiar with the proposal to raise foreign debt limits said the central bank had yet to give its views. Both officials declined to be identified since no decision has been made public yet.

($1 = 63.5700 rupees)

(Reporting by Manoj Kumar and Suvashree Dey Choudhury; Editing by Alan Raybould)