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

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

"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.

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.