* Move aims to boost dollar inflows, but fails to cheer market
* Govt allows foreign individuals to buy up to $1 bln corp debt
* Rupee down 12 pct in 3 months (Removes extraneous text from first paragraph)
By Arup Roychoudhury and Archana Narayanan
NEW DELHI/MUMBAI, May 29 (Reuters) - India will allow foreign retail investors to buy local corporate bonds for the first time in its latest move to bolster capital inflows and support the shaky rupee, though the action was seen as too limited to boost the local currency.
Analysts said the $1 billion cap on investment for overseas individuals in local corporate bonds was too small, while the government's expectation that it will take six to 18 months for those flows to come in would delay any immediate impact.
"While the foreign retail investor limit increase is a positive at the margin ... it is not a game-changer," said Kumar Rachapudi, fixed-income strategist at Barclays Capital in Singapore.
"$1 billion is not a big amount in this environment and anyways this will take a lot time to come in," he said.
The rupee dropped on Tuesday, snapping a three-day rally, with markets reacting more to strong dollar demand from oil importers.
The government gave detailed guidelines allowing qualified foreign investors (QFIs) to buy corporate debt. While the proposal had been announced in the budget in March, New Delhi had not yet provided details on the proposal, including the investment limit.
Thomas Mathew, head of the capital markets division in the finance ministry, said the flows from foreign investors will be more stable than existing institutional flows.
"We feel this will reduce volatility," he told reporters after announcing the measures.
The $1 billion limit is in addition to the existing $20 billion limit for foreign institutional investors (FIIs) in corporate bonds.
Foreign individuals still cannot directly invest in Indian government bonds. India allowed foreign individuals direct access to its stock markets in January.
Separately, a senior official told Reuters that the Reserve Bank of India has proposed to the finance ministry some measures that are also intended to boost inflows.
The RBI is suggesting a two-prong approach, said the source, who declined to be identified because the proposals have not not been publicised.
The first is to rejig the investment limits in Indian bonds . T he country a llows f oreign investors to buy up to $60 billion in its debt markets, of which $15 billion can be invested in the more popular government bonds and $45 billion into corporate an d infrastructure deb t.
There are sub-categories within these two divisions, with their own individual investment limits. The RBI hopes to attract more inflows by proposing th e finance ministry raise t he quotas of popular investments like som e types of go vernment debt and reduced l im its for less popular products.
The RBI is also suggesting changing the so-called "lock-in" periods for some of its debt investments. I ndia currently mandates a minimum holding period for some of its debt.
For example, the government will allow foreign investors to buy only securities with maturities of five years or longer for some of its federal debt, effectively shutting them out from investing in the more popular shorter-dated notes. [ID: nL4E8GT3S1]
The action from the government, and the proposals from teh central bank for further action, come as the rupee, which fell to a lifetime low of 56.40 to the dollar last week, has been the worst performing major Asian currency since February.
Global risk aversion due to worries over the euro zone crisis, as well and India's slowing growth and wide fiscal and current account deficits, have turned away investors.
Foreign investors have bought a net of $177.7 million in debt and equity in May, far below the $7.2 billion in net inflows in February. (Writing by Suvashree Dey Choudhury; Editing by Tony Munroe, Ron Askew)
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