The Reserve Bank of India on Thursday allayed fears that sharply rising foreign exchange reserves were due to hot money from expatriate Indians chasing interest rate arbitrage opportunities.
"Inflows of hot money or short-term funds by way of non-resident Indian deposits are not expected," the Reserve Bank of India said in a statement.
It said net inflows through expat deposits rose to $2.8 billion in the past year to March, from $2.73 billion in the previous year, while forex reserves jumped $20.65 billion to $74.805 billion over the same period.
Deposit inflows were a paltry $434 million in the last quarter to March, when forex reserves climbed by $4.51 billion as the rupee appreciated against the dollar.
The forex reserves have added another $3.75 billion in the current year to a record $78.56 billion by May 9, RBI data showed.
The rise has coincided with a strengthening rupee as the dollar tumbled against other currencies overseas.
The rupee was at 46.9025/9125 a dollar in afternoon trade, up 1.2 per cent since March, after appreciating 2.8 per cent in the past year.
Analysts say a bullish outlook for the rupee has boosted foreign inflows, including into Indian bonds because of higher returns than US securities.
A one-year rupee deposit in a leading Indian bank pays around five per cent against the one per cent on a dollar deposit, while the one-year treasury bill yields around 4.68 per cent compared with 1.35 per cent on a two-year US treasury bill.
The central bank said the minimum maturity for popular deposits plans such as the rupee-denominated Non-resident External and dollar-denominated Foreign Currency Non-resident was one year.
While NRE deposits swelled, the central bank attributed it to the decision to stop accepting fresh deposits under the Non-Resident Non-Repatriable rupee deposit scheme from April 1, 2002.