"This was partly offset by appreciation in the value of foreign currency assets and will come under pressure whenever there is appreciation of Rupee against foreign currencies and depreciation in the value of gold," the RBI annual report said, adding that a one per cent appreciation in the value of rupee against US dollar at the current level of foreign currency assets will drain the EFR by Rs 1,314 crore.

"Likewise a one per cent appreciation in the value of US dollar against non-US dollar currencies will deplete the EFR by Rs 510 crore," RBI said, adding that a one per cent fall in the prices of gold will result in the erosion of the EFR by about Rs 129 crore.

Gains and losses on account of valuation of foreign currencyand gold are not booked in the profit and loss account, but in this EFR account. EFR is also used for replenishing Exchange Equalisation Account (EEA) inter alia to meet exchange losses on accrual basis in respect of liabilities under schemes involving exchange guarantees provided by RBI in respect of funds parked by the domestic financial institutions (DFIs).

"The balance in EEA as on June 30, 1999 amounted to Rs 618.61 crore and fully provides for exchange difference on foreign currency funds parked by DFIs. These funds are expected to be withdrawn by December 1999, and as exchange guarantees are no longer being given by RBI, the EFR will no longer come into pressure on this account The EFR at the end of June 1999 was equivalent to 17.2 per cent of foreign currency assets and gold holdings, as against 23 per cent at the end of June 1998.

Meanwhile, the balance in RBI's contingency reserve (CR), maintained to absorb the unexpected and unforeseen contingencies has gone up from Rs 13,789.41 crore as onJune 30, 1998 to Rs 23,007.06 crore as on June 30, 1999 due to the transfer of Rs 8917.65 crore from the income and transfer of unutilised balance of Rs 300 crore from National Industrial Credit (long-term operations) Fund.

"RBI is pursuing a pro-active policy of strengthening the CR and has accordingly set an indicative target of 12 per cent of the size of bank's asset to be achieved in phases by the year 2005," the annual report said.