The steps had been expected given RBI officials have expressed concern that FIIs are excessively invested in treasury bills, creating concerns about the sturdiness of these flows.
Regulatory data showed foreign funds have utilised almost 90 percent of the permissible limit of $5.5 billion in treasury bills, whereas overall debt limit utilisation stands at just about 60 percent.Existing investments in treasury bills would be allowed to taper off.
The RBI also allowed foreign investors to hedge against coupon proceeds due within the next 12 months, while saying it was working to allow overseas funds to hedge via currency futures in domestic exchanges, neither of which was previously allowed.
"The Reserve Bank will continue to work to ease entry while reducing risk to foreign investors from the volatility of flows," the central bank said in its policy statement.
The announcements came as part of the central bank's decision on Tuesday to keep interest rates unchanged.
Analysts said the eased hedging rules would likely have a limited impact, but should help make investing in debt easier.
The moves would also further develop domestic currency markets at a time when regulators worry about the popularity of trading of currency futures in offshore markets such as Singapore.
The rupee is only partially convertible, and thus not fully opened to foreign investors.The rupee has seen speculative bets in the offshore market last year, and these steps will help deepen domestic currency market further.
RBI Governor Raghuram Rajan, has been keen on increasing depth and transparency in India's financial markets.
India has also taken a number of measures to attract foreign investments ever since the rupee slumped to record lows in late August, but it wants those investments to flow into longer-term securities.
In February, the RBI, along with the capital market regulator Securities Exchange Board of India, cut the sub-limit in commercial paper to $2 billion from $3.5 billion.
India depends on capital flows to narrow a current account deficit that reached a record 4.8 percent of GDP in the fiscal year that ended in March 2013. Sudden outflows can destabilise the currency.
So far this year, foreign investors have invested $3.65 billion in Indian equities and $5.76 billion in debt.