At present, the EPFO invests only in public sector bonds out of the portfolio allocated for corporate bonds. The entire corpus of the fund at present aggregates Rs 1,27,000 crore (Rs 1270 billion).

Under the current norms, out of the total corpus, EPFO is allowed to invest 25 per cent in government securities, 30 per cent in PSU bonds, 15 per cent in state development loans and the remaining 30 per cent in a mix of all three instruments.

The investments in private sector bank bonds will start once the final guidelines are issued. To start with, the EPFO plans to invest around Rs 100-200 crore (Rs 1 to 2 billion) in private sector bank bonds which are triple A rated.

Meanwhile, while the board has "in principle" agreed to allow trading by the EPFO, modalities such as the amount of allocation and norms for treating profit and loss are yet to be worked out.

Sources added that the decision has been taken to help the fund earn a higher rate of return so as to maintain the high rate of interest of 8.5 per cent.

However, the board could not come to a consensus over the issue of allowing the fund to invest in equities.  As per the investment norms, EPF is allowed to invest five per cent of its incremental income in equities and equity linked mutual funds.

This decision for investment in private sector banks bonds comes at time when the market is expecting a string of corporate bonds to enter the market.

The banks have to raise capital either through issue of shares or bonds to cope up with higher capital requirement for meeting prudential requirements of Basel II.

The RBI has also facilitated the issuance of hybrid instruments, which is a mix of debt and equity by the banks, to raise capita.

Market players feel that EPFO could invest in these bonds as earlier supplies of bank bonds have already been subscribed by the other players.

Moreover, the available floating stock of the corporate bonds is limited as most of the bond holders prefer to hold it till maturity for earning higher returns.