The foreign exchange inflows story continues, despite the cap imposed by the Reserve Bank of India on the interest rate that can be offered on non-resident external deposits.

According to the weekly statistical supplement released by the RBI on Saturday, India's foreign exchange reserves have risen by $803 million or Rs 3,140 crore (Rs 31.40 billion) for the week ended July 25, 2003.

The RBI had capped the interest rate on the NRE deposits at 250 basis point over the London inter-bank bid offer rate or Libor on July 17 with the objective of curbing the arbitrage opportunities thrown up by interest rate differential in India and abroad.

According to analysts, while one week is a short time for coming to a conclusion as to whether the cap has affected the inflows, data reveal that forex inflows either in the form of foreign institutional investor inflows or NRE deposits continue to flow into India.

On a weekly basis, forex reserves scored a record growth of $1.591 billion for the week ended May 23, 2003.

Players said compared with FII inflows, NRE deposits constitute a small portion of the forex inflows.

Nevertheless, the cap has been partially successful in curbing the arbitrage opportunities enjoyed by investors.

With the interest rate differential fetching a good spread, foreign exchange inflows have been making their way to the country.

However, the RBI through its intervention activities had made it clear to the players that while forex inflows add to the reserves, undue volatility created by the inter-bank arbitrage is not desirable.

Participants point out that while inflows all the while have been good, lack of dollar demand has been accentuating the actual inflows.

But last week, the dollar's appreciation around the globe has made the importers and banks seek forward cover and exporters to cancel their forward contracts.

This has spawned demand for dollars and in turn lifted premiums on the forward dollar.