India will allow individual foreign investors direct access to its stock market from January 15, the government said on Sunday, the latest step to liberalize Asia's third-largest economy after a year of big losses on the benchmark Sensex <.BSESN> index.

Previously, foreign nationals were limited to investing in India's equity market through indirect routes such as mutual funds, or through institutional vehicles. [ID:nL3E7J90YK]

The central government has decided to allow qualified foreign investors to directly invest in (the) Indian equity market in order to widen the class of investors, attract more foreign funds, and reduce market volatility, the government said in a statement.

Analysts said the decision to allow foreign nationals to invest in Indian equities was a positive move but it was unlikely to result in an increased flow of overseas funds in the near-term due to weak market conditions.

At a time when the foreign institutions are reducing their exposure to India, it would not be prudent to expect foreign individuals to start investing in our markets, said Jagannadham Thunuguntla, research head at brokerage SMC Global Securities.

We can see some impact of this decision when the stock market conditions improve, he said.

In the past 20 years India has gradually opened its economy to foreign cash. The economy is now faltering after growing at an annual average of about 8 percent for several years.

The rupee shed 24 percent of its value against the dollar last year and the current account deficit is widening.

Many economists predict growth below seven percent for the fiscal year that ends on March 30.

Indian shares posted their first annual fall in three years in 2011 as a combination of near double-digit inflation, high interest rates, slowing domestic growth and policy inaction turned off investors already shaken by global headwinds.

Foreign fund inflows, a major driver of Indian stocks, dried up with net outflows of about $380 million as of Wednesday, a far cry from record inflows of more than $29 billion in 2010 that had powered a 17 percent rise in the benchmark index, following an 81 percent surge in 2009.

(Reporting By Frank Jack Daniel; additional reporting by Sumeet Chatterjee in MUMBAI; Editing by Paul Tait)

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