An equity advisor watches share prices at a financial consultants' firm in Mumbai, India (File Photo)

The Central Bank recently relaxed limits on overseas investments by Indian mutual funds, domestic companies and individuals.

Mutual funds can now invest $5 billion outside the country - an increase of 25 percent. Domestic companies can now invest up to four times their net worth abroad, and individuals are allowed to double the amount they send overseas every year, to $200,000. 

The measures are intended to bring down the value of the rupee, which is at a nine-year high against the dollar. The rupee has risen by more than 10 percent since the start of the year, and nearly two percent in the past week.

Economist P.K. Chaudhury, of the investment firm ICRA, says the rupee's rise has been fueled mostly by a surge of foreign money into the country.

"I think it is more because of inflow of dollar, so supply has gone up, and that possibly has put pressure on the [rupee] price." said P.K. Chaudhury.

Much of those dollars are coming in from foreign funds, which want to benefit from India's buoyant stock markets. Overseas funds have invested a record $11 billion this year. About one and a half billion dollars have poured in since September 20, as Indian stock markets rallied to their highest level ever.

The Mumbai stock exchange's Sensex touched 17,000 points earlier in the week. The markets have gained 22 percent overall this year.

Economist Chaudhury says the strengthening rupee is not expected to hurt India's strong growth, because the country's net imports are higher than its exports. But he says some sectors of the economy will suffer.

"We would not suffer so much from the economic side, but individual businesses, particularly the exporters and IT sector and other service industries who are dependent on exports to [the] U.S., they would be affected adversely," he said.

Small and medium size exporters in such fields as garments, leather and brassware have been hit badly. They have been asking the government to find ways to soften the effect of the rising rupee on their industries.