The Indian government said on Thursday it had eased overseas borrowing rules for firms and was raising limits on foreign investment in domestic bonds in a move economists said would deepen its debt markets and shore up the rupee.

India tightened its overseas borrowing rules last August, restricting how much local firms could raise overseas and then spend in rupees.

The move was designed to reduce high capital inflows which were pushing up the currency and complicating monetary policy management.

Policy makers have often talked about deepening the home bond market as the funding needed to upgrade India's infrastructure is huge, but they have been opening it up only gradually.

The finance ministry said in a statement the limit for foreign institutional investment (FII) in government and corporate bonds would rise to $5 billion and $3 billion respectively from $3.2 billion and $1.5 billion.

The limit on how much a company could borrow abroad and repatriate would go up to $50 million from $20 million and to $100 million for companies in the infrastructure sector. The reserve Bank of India (RBI) said this change was effective immediately.

Saumitra Chaudhuri, a member of Prime Minister Manmohan Singh's Economic Advisory Council, said the move to raise the FII limit was more significant than easing external debt rules.

"When Indian companies go overseas to raise debt, the market is created overseas. When FII investment limit is raised, Indian companies issue bonds to FIIs in India and the market will remain in India," Chaudhuri said.

 "Hence encouraging the latter not only channelises funds to Indian companies but also helps develop the Indian bond market."

FUNDING NEEDS

India needs about $500 billion in investment to modernise its roads, ports, rail and power networks.

Industry and economists say poor infrastructure is one of the biggest hurdles to the country achieving a sustainable high growth rate to spread wealth and create jobs, and have urged greater liberalisation of the corporate bond market to help put domestic savings to use.

The government's move last August to slap a limit on the amount of debt which could be raised overseas and then brought back to India aimed to tone down the flow of capital into one of the world's fastest growing major economies.

External commercial borrowings had doubled in the year to March 2007 and at the time the partially convertible rupee had gained about 10 percent on the dollar in the year, sparking complaints from Indian exporters. The central bank intervened heavily to try to slow its ascent.

But with a rising oil import bill and a net $3.74 billion in foreign portfolio outflows from shares this year, the rupee has lost ground, hitting a 13-month low of 43.21 per dollar last week and shedding nearly 8 percent since the start of 2008.

A. Prasanna, economist at ICICI Securities Primary Dealership, said Thursday's decision would be positive for the rupee when it opened on Friday.