The Reserve Bank of India [Get Quote] has opposed Finance Minister P Chidambaram's budget proposal to use part of the foreign exchange reserves of over $200 billion to provide "credit wrap," or credit guarantee insurance, for financing infrastructure projects.

Credit guarantee insurance was to be provided to private Indian companies through an overseas subsidiary of Indian Infrastructure Finance Corporation Ltd, a government-owned financial institution. This would allow them to raise long-term resources more easily in international markets for infrastructure projects.

However, the RBI held that the credit wrap proposal did not conform to Section 17 (12B) of the Reserve Bank of India Act, 1934.

The clause concerned permits the RBI to give loans and advances in foreign currencies to financial institutions to finance international trade and import of capital goods but not for providing credit insurance to companies.

The idea of such a subsidiary was originally mooted by the Deepak Parekh Committee on infrastructure financing in its interim report. The committee had suggested setting up two overseas subsidiaries of IIFCL that would borrow funds from the RBI to meet India's infrastructure needs.

The first subsidiary, to which the RBI has given conditional approval, will lend money to Indian companies to finance overseas capital goods purchases for infrastructure projects.

The finance ministry does not agree with the RBI's objections. "We have communicated to the RBI to explain its objections fully," a finance ministry source said.

The RBI has also held that the India Infrastructure Initiative (created by IIFCL, Blackstone, Citigroup and IDFC [Get Quote]), which has sought to bring $3 billion through external commercial borrowings, should park it outside India.

However, the finance ministry feels the newly-created fund should be allowed to bring the ECB amount into India. "This will allow competitive pricing for infrastructure financing in the country," a ministry official said.