Foreign individuals can now invest in India

There has been significant international interest in participating in India’s stock market [EPA]

India has said it would open up its stock market to individual foreign investors for the first time.

The government said in a statement on Sunday that it had taken the move “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.

The Indian economy has grown strongly over the last 15 years and many foreign investors have been keen to enter the market in a fast-developing country of 1.2bn people.

However recent financial data has been disappointing, with the main Sensex index recording a 25 per cent plunge in 2011 and many analysts predicting more falls in 2012.

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.

Sentiment also took a beating when key reforms allowing foreign supermarkets into India were rapidly reversed, while the Congress-led government has battled against accusations of policy drift amid several corruption scandals.

Pranab Mukherjee, the finance minister, 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 7.5 per cent from an original 9 per cent.

Seven per cent growth is a pace that any developed economy would envy but is far below the 10 per cent target needed to tackle poverty 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 $29bn-worth, the previous year, according to market regulator the Securities and Exchange Board of India.

The Reserve Bank of India has increased rates 13 times since March 2010.