The proposal was cleared at an FIPB meeting chaired by Economic Affairs Secretary Arvind Mayaram, sources said.
The FIPB approved raising the foreign equity holding in Axis Bank to 62 percent from 49 percent, subject to the condition that the holding of foreign institutional investors does not exceed 49 percent.
At present, the FII holding in the bank is 40.7 percent while domestic institutional investors have 8.77 percent.
Axis Bank had approached the FIPB last month after the RBI said the limit of investments through Global Depository Receipts (GDRs), American Depository Receipts (ADRs), FDI, NRI and FIIs in the bank had breached the overall limit of 49 percent of its paid-up capital.
Shares of Axis Bank closed at Rs 1,140.25, up 5.56 percent on the BSE.