By Suvashree Dey Choudhury and Abhijit Neogy
MUMBAI (Reuters) - The Reserve Bank of India (RBI) has agreed to earmark some dollar funds from foreign exchange reserves, reversing its earlier stance, to partly fund the government's strategic wealth fund that will buy energy assets overseas, two sources with direct knowledge of the matter said on Friday.
India has been keen to set up a sectoral fund, which could exceed $10 billion, to buy coal blocks, minerals, gas and oilfields abroad to meet the growing energy needs of Asia's third-largest economy, a government source said.
"The basic objective of the fund is to use it as a war chest to fund buys abroad. China is already big in this process but we need to also be alert to these opportunities," the government source said.
"One of the options is the government can buy dollars from the RBI and provide the equivalent rupees at market rate," said a central bank source.
The rupee equivalent can be garnered from state-run firms' cash surpluses or from a part of the proceeds obtained from planned sales of their shares, the central bank source said.
He said the sectoral fund was different from a sovereign wealth fund (SWF), as it would not be driven by the profit motive.
A sovereign wealth fund is similar to a private equity fund which invests in strategic stocks for wealth creation.
The RBI has not been keen to use dollar reserves to partially fund the strategic sovereign wealth fund as a major part of the bank's reserves consist of portfolio inflows which are volatile, unlike long-term stable foreign direct investment.
Besides, such dollar inflows help to bridge the country's current account deficit, which stood at 2.6 percent of GDP at the end of March.
However, the RBI is making an exception as the special purpose vehicle will not be driven by the profit motive and will only restrict its investment in energy assets which will be important for the country's energy security.
"There is no timeframe to seed this fund. There will be more deliberations to finalise the contours and then it will go to the cabinet for approval," the government source added.
(Editing by Malini Menon and Clarence Fernandez)