With this move, the individual investors will be able to invest directly in Indian stock market. The move taken by the Central bank and stock market regulator will help to reduce volatility in the stock market and regain investor confidence.

India is one among the emerging economies who has been hit most by Foreign Institutional Investors (FII) outflows in 2011. FIIs pulled out more than $4 billion from the Indian equity market last year.

India's macro economic factors like depreciating rupee, high inflation, high fiscal deficit, etc have left doubts about the growth of the Indian economy on the minds of FIIs, forcing them to withdraw funds.

The finance ministry said in a statement on Sunday that the new rule will be effective from January 15.

It further said that the measures were intended to widen the investor class, to attract more foreign funds, to reduce market volatility and deepen the Indian capital market.

As per the statement, the new category of investors will be categorized as qualified foreign investors, or QFIs.

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