India likely to raise foreign investment limit in government bonds: sources

By Manoj Kumar and Rajesh Kumar Singh

NEW DELHI (Reuters) - India is likely to raise the cap on foreign investment in sovereign debt by $5 billion soon, two finance ministry officials said on Tuesday, a move that may support the sliding rupee and help fund a high current account deficit.

The rupee fell 4.8 percent in May and was the worst performing Asian currency.

A weak rupee will push up India's import bill, which could fuel inflation and worsen a current account deficit that was equivalent to a record 6.7 percent of gross domestic product in December.

"The file has been sent to the finance minister for signing, and once it comes back, the decision could be announced any time," one of the two finance ministry officials told Reuters. The officials declined to be named as they were not authorised to speak to media.

The government is worried that the strengthening dollar and investor risk aversion could lead to capital outflows, making it tougher to fund the current account deficit. Finance Minister P. Chidambaram reckons that funding the deficit will require at least $75 billion in foreign inflows.

India currently allows foreign institutional investors (FIIs) to purchase a total of up to $25 billion in government debt and $51 billion in corporate bonds.

A weakening rupee has raised concerns over funding of the huge current account deficit, prompting foreign investors to sell over $750 million in debt in the three sessions to Friday.

As on June 3, nearly 76 percent of the total foreign investment limit in government bonds had been taken up, according to the data compiled by the National Securities Depository Ltd.

India's failure to attract sufficient capital inflows had precipitated a balance of payment crisis in 1991, when the central bank was forced to airlift 47 tonnes of gold to Europe as collateral for a loan to avert a sovereign default.

Perhaps aware of the economy's vulnerability, Finance Minister P. Chidambaram has been courting foreign investors on his roadshows in Asia, Europe and North America.

To attract higher inflows, Chidambaram cut tax rates in April cfor foreign investors on interest income from investments in government and corporate debt.

The officials said the government was also planning to allow FIIs to invest in government bonds on "first-come-first-serve" basis, replacing the current system of auction.

It is also considering a proposal to relax due diligence rules, also known as "Know Your Customer", for foreign portfolio investors, they said. (Reporting by Manoj Kumar and Rajesh Kumar Singh; Editing by Ross Colvin & Kim Coghill)