In a meeting of senior cabinet ministers, Prime Minister Manmohan Singh cleared plans to allow 100 percent FDI in telecoms, Commerce and Industry Minister Anand Sharma told reporters.
The move will allow companies such as Vodafone Group Plc, Telenor ASA and Sistema to operate in the country without requiring an Indian partner. Foreign investors are currently allowed to hold a maximum 74 percent in local phone carriers.
Mr Sharma added that the government will have to approve any FDI proposal beyond 26 percent in the defence production sector, on condition it involves state-of-the-art technology.
India's weakest economic growth in a decade and a record high deficit in the current account, the broadest measure of a country's international trade, have made the rupee the worst-performing emerging Asian currency so far this year.
It hit an all-time low of 61.21 per dollar last week and is down nearly 10 percent against the dollar since May.
To stabilise the currency, the central bank on Monday night raised short-term borrowing costs, restricted funds available to banks and said it would sell 12,000 crore rupees in bonds, effectively draining cash from the market.