At the same time, the sub-limit for longer time FPIs such as sovereign funds has been reduced by $5 billion as there was less demand in this category.
The overall cap remain unchanged at $30 billion.
The previous cap of $10 billion had been utilised by only about 20 per cent in this category. The $20 billion limit for general FPIs has been always fully exhausted.
The decision comes after Reserve Bank of India (RBI) relaxed sub-limit for foreign institutional investors in government bonds by $5 billion.
"It has been decided to enhance the investment limit in government securities available to all FPIs by $5 billion by correspondingly reducing the amount available to long term FPIs from USD 10 billion to USD 5 billion within the overall limit of USD 30 billion," Securities and Exchange Board of India (Sebi) said in a circular.
Long-term investors include sovereign wealth funds (SWFs), multilateral agencies, pension, insurance funds and foreign central banks registered with Sebi.
Earlier this year, the limit for long-term investors for investment in government securities was raised from USD 5 billion to USD 10 billion within the total limit of USD 30 billion available to them.
Sebi, however, said the increment investment limit of USD 5 billion shall be required to be put in government bonds with a minimum residual maturity of three years.
It further said, all future investment against the limit vacated when the current investment by an FPI runs off either through sale or redemption would also be required to be made in government bonds with a minimum residual maturity of three years.
"...there will be no lock-in period and FPIs shall be free to sell the securities (including those that are presently held with less than three years of residual maturity) to the domestic investors," Sebi said.
FPIs encompasses all foreign institutional investors (FIIs), their sub-accounts and qualified foreign investors (QFI) under a new regime which has been effective from June 1. The new regime divides FPIs into three categories as per their risk profile and the KYC (know your client) requirements.
Sebi said that FPIs, which had acquired debt limits in the auction held earlier this week, may utilise the limit as per the previous limits.
In the auction held on July 22 for government bonds, such securities attracted bids worth Rs 4,857 crore -- almost double the amount of such securities on offer at Rs 2,521 crore.