The Reserve Bank of India has once again reiterated that there is no evidence that "greater arbitrage" has contributed to the accretion of $20.8 billion to the foreign exchange reserves in fiscal 2002-03.

A substantial portion of the fresh accretion to the reserves -- which as of June 20 stood at $82.12 billion -- has been by way of current account surplus, currency valuation gains and other non-debt creating flows.

In effect, the RBI has debunked the myth that the surge in India's forex reserves is the outcome of non-resident Indians pouring money into the country to take advantage of higher interest rates.

There has been a net increase of $2.8 billion in NRI deposits in the April 2002 to March 2003 period as compared with $2.4 billion during April-December 2002. In the previous year (2001-02) also, the accretion of deposits was of the same order.

"Thus, there is no evidence of greater 'arbitrage' having contributed to higher accretion to reserves in FY03," said a study by the RBI's department of economic analysis and policy on foreign exchange reserves.

In FY03, accretion to the reserves was due to a current account balance of $3.7 billion, capital account (net) of $13.3 billion, and valuation change of $3.8 billion.

Since the debt creating flows are relatively low, the cost of additional reserves is not likely to be very significant.

It may be noted that almost the entire addition to reserves, in the last few years, has been made without increasing the overall level of external debt.

Valuation changes, reflecting the appreciation of the euro, pound and yen against the dollar, account for $3.8 billion of accretion to total reserves during FY03 as against a valuation gain of $3.2 billion in April-December 2002.

When non-US currencies appreciate in terms of the dollar, there is accretion to reserves by way of valuation gains. The reverse is the case when these currencies depreciate against the dollar.

During the period under review, the euro and pound have appreciated substantially against the dollar. (This is excluding the appreciation in the value of gold which is not considered for compilation of balance of payments).