The Reserve Bank of India has more than doubled its reserves for contingencies this fiscal amid fears of the return of financial instability, such as the one in 2008, due to the worsening European sovereign crisis and flagging US economic recovery. 

Financial market troubles had eroded the profitability of the central bank's international transactions in its last fiscal as interest rates on safe treasury securities, such as the US and the UK, remained at record low levels. 

But tightening domestic credit market partly compensated for the lower profits from overseas. 

Lower returns on some of the assets also led to the central bank reducing transfer of surplus funds to the treasury by 20%. 

"The decline in the income from foreign assets in 2011 was more than offset by earnings from domestic assets which have expanded," RBI deputy governor Subir Gokarn told reporters. 

Governor Duvvuri Subbarao has been warning of a likely instability in the global financial markets as Greece, Portugal and other peripheral nations struggle to raise funds due to high government debt. The rating downgrade of the US by Standard & Poor's has added fresh dimension to the looming global financial crisis. 

The provisions made for contingencies reserves increased to Rs 12,167.27 crore, from Rs 5,168 crore a year ago, the central bank said in its annual report. Its fiscal runs between July and June. The central bank's transfer to the government fell to a three-year low of Rs 15,009 crore, from Rs 18,759 crore a year earlier. 

"There is heightened anxiety about whether the euro area will be able to agree on an economically viable, fiscally sustainable and politically feasible solution to the vexing sovereign debt problem," Subbarao had said. 

The near-zero interest rates in the US squeezed returns from foreign currency assets. 

Earnings from deployment of foreign currency asset and gold fell 15% to Rs 21,149.6 crore, said the report. 

But the 11 interest rate increases and strong demand for loans have helped RBI earn more than in the previous year as banks borrowed at higher rates. 

Earnings from domestic sources more than doubled to Rs 15,920 crore. 

The rate of earnings on average domestic assets rose from 3.45% to 3.77% in 2010-11. Meanwhile, RBI's gross income increased 12.7% to Rs 37,070 crore while its expenditure rose 3% to Rs 8,655.2 crore.