(Repeats to widen distribution)
* Government puts on hold higher cap on FII limits, citing outflows -source
* Meeting focussed on easing rules for sovereign investment funds
* Senior ministry official fears further falls for the rupee
By Manoj Kumar
NEW DELHI, June 10 India's finance ministry, the central bank and market regulators on Monday discussed loosening rules for investment by foreign sovereign wealth funds in response to a sharply falling rupee and a wide current account deficit that are hurting the economy.
Two senior ministry officials, who declined to be named, said the aim was to attract more capital flows from wealth funds in Middle East countries. Finance Minister P Chidambaram has visited the Middle East in recent months to drum up investment.
"We will again meet and it will take some more time to finalize measures on sovereign funds," said one official who attended the meeting.
India's rupee hit a record low of 57.76 against the dollar on Monday, escalating worries about the country's current account deficit and complicating the task of the central bank as it tries to loosen monetary conditions to spur an economic recovery.
The meeting on Monday was arranged prior to the record being hit.
Another senior official at the ministry said the government was taking all possible steps to "calm" markets and was committed to reining in the current account deficit.
He said government plans to raise the cap on investment by foreign institutional investors (FII) by five billion dollars in government debt has been put on hold, because money was currently flowing out of India.
"The FII capital outflows are likely to continue for next 10-15 days," he said adding he feared the rupee could touch 58 or 59 against the dollar if the outflows continued.
He blamed the outflows on investor perceptions that the United States is preparing to tighten monetary policy through a rollback of its quantitative easing programme.
He said the government expects the situation to stabilize in the next couple of weeks and that measures including a hike to 8 percent in gold import duty from 6 percent would help reduce pressure on the current account deficit.
"We expect gold imports will come down following RBI restrictions and hike in import duty," said the official, who has been involved in recent government strategies to curb gold imports.
He said the government could consider more fiscal measures to cut gold imports if imports do not fall to the desired level. He declined to say what was the desired level of gold imports. (Reporting bu Manoj Kumar; Writing by Frank Jack Daniel; Editing by Sanjeev Miglani)