The Reserve Bank of India may reduce the rate of interest that banks offer on NRI deposits to discourage foreign exchange inflows, in addition to proposals being considered by the government to put curbs on external commercial borrowings.

NRI deposits increased to $39.13 billion from $35.13 billion at the end of March 31, 2006, and Indian companies and banks raised a total of $28.71 billion from overseas markets in 2006-07, 29 per cent more than a year earlier.

The large inflows have resulted in the rupee appreciating sharply. In March 2007 alone, the rupee rose by about 2.2 per cent and by over 9 per cent since July 2006 on account of strong foreign inflows.

The attempt at curbing some of the foreign exchange inflows is meant to allow the central bank to focus more on containing inflation and to ensure that it does not divert energies at checking appreciation.

The RBI buying foreign currency flows to prevent a sharp appreciation of the rupee results in easy domestic liquidity, which further fuels inflationary expectations.

The country's foreign exchange reserves increased by over $23 billion in the quarter ended March 2007, helping the reserves to cross the $200 billion mark as the 2006-07 financial year closed.

NRI deposits and ECBs are the only foreign inflows, which can be tackled to a certain extent.

The government cannot tinker with other foreign inflows like foreign direct investment (FDI) and foreign institutional investors (FII) as it would hurt the overall positive investment climate in the country.