The objection came after the Commerce and Industry Ministry circulated a draft cabinet note for inter-ministerial consultations proposing 100 per cent FDI in areas such as high-speed train systems and dedicated freight lines.
"There should not be FDI in highly sensitive parts of the railways," a Home Ministry official told PTI.
Managing passenger and freight traffic and operations of trains are considered to be the most sensitive parts of the Indian Railways.
The proposal was mooted by the Department of Industrial Policy and Promotion (DIPP) under the Commerce and Industry Ministry.
The department believes that permitting foreign investment in the cash-starved Railways would help in growth of the sector.
Railway is a critical sector for driving India's economic growth and it has the potential to raise GDP by over one per cent.
Besides high-speed train systems and dedicated freight lines, there is also a proposal to allow foreign investment in sub-urban corridors and freight lines connecting ports, mines and power installations.
According to sources, an urgent need was felt to modernise, strengthen and expand the Indian railway network which would require very large capital investments.
At present, there is a complete ban on any kind of FDI in the Railways sector except mass rapid transport systems.
In its election manifesto, the BJP has committed to modernise and upgrade the Railways and launch Diamond Quadrilateral project of high-speed train network.
The UPA government had also tried to relax FDI norms in Railways but could not push the proposal because of the general elections.