The Reserve Bank of India (RBI), the country's central bank, will soon allow South-east Asia's largest bank to open between six and eight branches, people familiar with government thinking told The Straits Times.

DBS, which operates a branch each in Mumbai and New Delhi, might be allowed a new branch in a metropolitan city such as Mumbai or Chennai for every branch that it opens in a Tier II city such as Varanasi or Moradabad.

The RBI go-ahead will remove a bone in the throat of an otherwise excellent bilateral relationship between the two countries.

Under a Comprehensive Economic Cooperation Agreement signed between the two countries in June 2005, Singapore banks were to be allowed a total of 15 new branches within three years.

In turn, Singapore was to give qualifying full bank (QFB) status to three Indian lenders, if they were able to meet regulatory benchmarks such as being classified as investment grade by a major ratings company.

However, India's national rating has been below investment grade and generally company ratings rank below the sovereign rating, so the two top Indian banks - State Bank of India (SBI) and ICICI Bank - have been unsuccessful in winning QFB status in Singapore.

This angered India's Finance Ministry, which has been noticeably slowfooted in dealing with Singapore issues. RBI too has its own road map for phasing in the entry of foreign lenders into the Indian market, which has blocked faster expansion.

In addition, RBI wanted DBS to open rural branches in tandem, which the Singapore lender baulked at. The Tier II city branches are probably a compromise that might be easier for DBS to live with.

Last year, ratings agency Standard & Poor's elevated India to its lowest investment grade, setting the stage for the Monetary Authority of Singapore (MAS) to move on its own front.

The larger branch network for DBS India will also boost the Singapore lender's plans to capture more of Asia's trade flows.

India is the second-fastest- growing major economy in the world after China, expanding at an average 8.5 per cent a year in recent years. Exports are booming, and second-tier cities such as Nashik are plugging into a global network of suppliers and customers for everything from carpets to light machinery and polished diamonds.

Bilateral trade between China and India has meanwhile topped US$40 billion (S$55.3 billion) a year. India's trade with South-east Asia is also poised to jump with the signing this year of a free trade treaty with the region.

DBS, after a spurt of growth by acquisition, is positioning itself for organic expansion across its Asian footprint. A five-fold growth in its branch network in India might fit nicely into this scenario, coming on top of its national licence in China, which allows it to grow its network across the mainland.

RBI spokesman Alpana Killawala declined to confirm or deny the decision regarding DBS.

A senior Indian official said RBI's move is linked also to apparent movement in SBI's application for a full retail licence in Singapore.

'The two central banks have been talking, which is a positive thing,' the official said.

'It looks like MAS is poised to give QFB status to SBI.'