NEW YORK (Reuters) - The Securities and Exchange Board of India is planning to ease restrictions on derivatives trading, and is considering allowing investors to sell shares short, the chairman of India's securities regulator said on Wednesday.

The moves come in response to investor requests, Securities and Exchange Board of India Chairman M. Damodaran said at a conference in New York.

Within the next few weeks, the regulator is planning to increase the allowed size of derivatives positions, Damodaran said, which should make it easier for investors to hedge their positions.

Meanwhile, an advisory committee is looking into the possibility of allowing investors to sell shares short, or bet that shares will fall by borrowing them, selling them, and potentially buying them back later at a lower price.

"I didn't want to preempt them by announcing this, but I hope the next time I am here for a speech we will be able to talk about this," Damodaran said in response to a question from the audience.

Permitting investors to short shares would allow stock values to more accurately reflect the opinions of all investors.

India's stock market has surged 28.5 percent this year, and has doubled over the last two years.

Foreign capital has helped drive share prices higher, and some are concerned that these investors could leave just as quickly.

But Damodaran said on Wednesday that domestic investors have also been a significant source of demand for shares.

IPO MARKET STILL STRONG

Initial public offering activity should remain strong in coming months, and could include offerings from public banks, manufacturing companies, and companies outside India, Damodaran said.

Some bankers and fund managers have expressed concern that the IPO market could lose momentum in coming months after changes to the way shares are allotted.

But companies are still eager to raise funds. Public banks may tap the market in part to raise capital as global capital requirements changes, Damodaran said.

Meanwhile, Indian manufacturers are reaching the point where they need to raise funds for capital expenditure.

Some Asian companies outside India have also looked into tapping the market, he added.