New Delhi could raise the foreign investment limit in government debt soon, as almost all the available allocations have been taken up by overseas buyers, according to a media report.
Prime Minister Narendra Modi's government could raise the amount foreign investors are allowed to buy by $5bn (£2.9bn, €3.6bn).
The finance ministry will decide on the matter after talks with the Reserve Bank of India (RBI) and markets regulator Securities and Exchange Board of India (Sebi), unnamed sources told Reuters.
The 10-year benchmark bond yield shed 3 basis points to 8.49% following the news.
Standard Chartered said in a note to clients: "Our Indian government bond (IGB) positioning indicator (SIGMA) for May increased to -2.25 from -3.05 in April, providing a bullish signal for duration in June. On our scale, -5.00 indicates the maximum position of accumulated net selling by active investors in the past six months.
"The pattern of market activity in May reversed for foreign banks, which turned net buyers of IGBs from being net sellers in April. Mutual funds remained net buyers, and primary dealers reduced their net selling of IGBs in May. We have a Positive outlook on IGBs on attractive carry for foreign investors and a relatively dovish central bank."
The current cap is 995.46bn rupees ($16.85bn).
As of 6 June, foreign investors owned 886bn rupees worth of government debt, or 89% of the available allocation – the surge in inflows followed Modi's election victory.
When the limit hits 90%, foreign investors are allowed to buy debt only through an auction, widely considered as inconvenient.
The renewed interest in Indian government debt comes on the back of hopes that Modi will be able to push through sweeping reforms, such as expediting investments and clearing infrastructure projects, to boost an economy suffering its worst slowdown in more than 25 years.
New Delhi last raised the amount of government debt that foreign investors can buy, by $5bn, in June 2013.