Rules governing sourcing of products, infrastructure investment and selection of cities have been relaxed.
India had opened up multi-brand retail to foreign investors last year, but no foreign supermarket chain has yet entered the country.
The move also triggered a series of protests in India.
The previous rules made it mandatory for foreign supermarkets to source 30% of their products from small Indian firms.
The government has retained that requirement, but said foreign firms will be given five years in which to reach that target, giving them the option of importing goods from overseas initially.
Global chains will also have to put 50% of their initial investment in to building back-end infrastructure such as cold storage facilities.
Foreign retailers will also be allowed to set up shop in cities with a population of less than one million, which they had been barred from earlier.
India, home to more than one billion people, is seen by many foreign investors as a key growth market, not least because of the sheer size of its population.
A rise in incomes and a growing middle class has further added to the country’s appeal.
As a result, when the government announced that it was opening up the multi brand retail sector to foreign firms – many had hoped that foreign companies would jump on the opportunity.
However, the conditions set by the government had prompted many chains to hold back on their plans.
Some analysts said that the move to ease some of these rules was likely to generate more interest among foreign firms.
“The new rules have removed some major stumbling blocks and should encourage foreign retailers to enter India,” said Devangshu Dutta, who heads retail consultancy Third Eyesight.
However, the move has also faced opposition in India.
There have been concerns that the arrival of big name supermarkets may hurt the small retailers in the country.
Analysts said that with national elections in India due next year, foreign firms may still hold back on any potential investment amid concerns that a change in government may see derail the opening up of the sector.