India's central bank 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, sources with direct knowledge of the matter said.

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 on Friday.

'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 (Reserve Bank of India) 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 part of the proceeds obtained from planned sales of their shares, the bank source said.

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 per cent 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 time frame 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.-Reuters