NEW DELHI (AFP) - India's cash-strapped government on Saturday loosened debt market rules to draw more foreign investment to finance a record current account deficit as it promised a "next generation" of economic reforms.

Finance Minister P. Chidambaram announced a significant simplification of rules for placements by foreign institutional investors in government and corporate debt to lure more overseas funds.

He also said a "next generation" of reforms to further pry open the still heavily regulated economy and return it to high growth was in the works.

But he warned fallout from the eurozone crisis was hitting investment in Asia's third-largest economy even as attracting more foreign funds has become an urgent priority for the government to fund a bloated current account deficit.

The current account deficit - the gap between inflow and outflow of foreign currency - widened to a record US$22.3 billion (S$27.8 billion) or 5.4 per cent of gross domestic product, in the financial quarter ended September as imports outstripped exports.

The new rules unveiled by Chidambaram will allow foreign investors to invest up to $25 billion in long-term government bonds, an increase from $15 billion, and the sum could be hiked, depending on government financing needs.

The investment cap by foreigners in corporate bonds will remain $51 billion but rules that stifled foreign inflows will be streamlined, he said.

There will just be two investment "baskets" - one for government securities and one for all corporate bonds, he told an economic editors' conference.

India has been traditionally hesitant to allow widespread foreign access to its debt markets to avoid excess reliance on overseas investors.

But the high current account deficit has prompted it to rethink regulations as it seeks to avert threat of a downgrade by global credit ratings agencies.

"The current account deficit can be financed only through foreign inflows," Chidambaram told the conference.

He added the government had "travelled a considerable distance on the road" to putting its financial house in order and reducing regulation suffocating economic activity.

Last year, the Congress-led government initiated a string of liberalisation measures to open up sectors such as retail, insurance and aviation to foreign investors in a bid to jumpstart growth before it faces voters in 2014.

It has also partially deregulated fuel prices to lower a huge subsidy bill.

But economists say further liberalisation is needed to spur the economy - projected to expand by 5.0 percent this fiscal year to March 31, the weakest pace in a decade.

"We are steadily and surely working on the next generation of reforms," Chidambaram said.