This will raise the overall FII limit in Indian bonds to $75 billion.
The finance ministry and Reserve Bank of India (RBI) decided to create a separate window of $10 billion for foreign investment in debt where there will be no restrictions on maturity period.
The RBI will issue the circular in about a week, a ministry official said.
The move will help ease the pressure on the government in completing its market borrowings and aid companies to raise more funds through bonds needed for expansion. This will encourage more capital inflows and create a strengthening bias on the rupee. The additional inflows through the new window will help finance the current account deficit," said DK Joshi, chief economist at Crisil.
Joshi discounted the possibility of the additional capital flows curbing volatility in the exchange rate.
The government's move is prompted by the increased appetite from long-term investors like sovereign wealth funds, insurance and pension funds and central banks over the last couple of months in buying Indian bonds. Although investor interest has lately been visible across all bonds, G-secs were more sought after.
At present, the FII investment limit is capped at $20 billion for government securities, $20 billion for corporate bonds and $25 billion for infrastructure bonds.
In June this year, the existing limit for investment by Sebi-registered FIIs in G-secs was enhanced by $5 billion to $20 billion. The limit for corporate bonds was last hiked in November 2011.
The hiked limits will help the government in its borrowing. It is a positive for the bond yields," said A Prasanna, chief economist at ICICI Securities Primary Dealership.
The finance ministry has already moved the fiscal deficit target to 5.3% from the budgeted 5.1%, but analysts are doubtful of meeting the revised target. This means there could be extra borrowing at the end of fiscal year 2012-13. The hike in FII limit in gilts will help the government in the extra borrowing. The government is scheduled to borrow Rs 2 lakh crore during October-March after mopping up Rs 3.7 lakh crore in the first half.