India announced on Sunday that it would open up its stock market to individual foreign investors for the first time.
The Indian economy has grown strongly over the last 15 years and many foreign investors have been keen to enter the market in the fast-developing country.
However recent financial data has been disappointing, with the main Sensex index for the Mumbai market recording a 25 per cent drop in 2011 and many analysts predicting more falls in 2012.
The government in Delhi said in a statement that it had taken the move "in order to widen the class of investors, attract more foreign funds, and reduce market volatility and to deepen the Indian capital market."
It said the reforms would be put into operation by January 15.
Previously, foreign investors were only allowed to invest in the stock market via mutual funds or institutional schemes.
A long series of interest rate hikes, stubbornly high inflation and the rupee's slide to a record low against the US dollar have all hit growth in India over the last year.
Finance Minister Pranab Mukherjee blamed the fall in equities during 2011 on selling by foreign institutional investors and the rupee's woes, coupled with concerns over eurozone debt and slowing domestic growth.
Annual growth in India slipped to a two-year-low of 6.9 per cent in the latest quarter, hit by a series of interest rate hikes that have had little effect on inflation now at 9.11 per cent.
Rising prices have been a major headache for the government, which has cut its growth forecast for the fiscal year to March 2012 to 7.5 per cent from an original blistering nine percent.
Seven percent growth is a pace that any developed economy would envy but is far below the 10 per cent target set to tackle grinding poverty levels in Asia's third-largest economy.
Overseas funds were net sellers of $358 million-worth of Indian stocks in 2011, having been net buyers of $29 billion-worth the previous year, according to market regulator the Securities and Exchange Board of India.
The Reserve Bank of India has hiked rates 13 times since March 2010.