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It's depositors' interest again, at zero risk
Nandita Datta
Fixed-income investment opportunites are back with a bang. Retail investors, who had moved out of this market after the sharp fall in interest rates last year, can once again look forward to higher yields. By hiking the "bank rate" by two per cent from 9 to 11 per cent, the Reserve Bank of India has given a clear signal of an upward movement in interest rates. Short-term rates, which were already moving northwards, have been given a shot-in-the arm. But, more significantly, the RBI's move may signal a rise in medium-term rates and, possibly, long-term rates. This coupled with the fact that sentiments in the equity market are still yet to look up bodes well for the fixed-income investor.Says a secondary market dealer in debt securities, "The writing is on the wall. Interest rates in the medium to long-term may rise by two per cent or more. The perception that the package is temporary may not be true as the RBI will give preference to maintaining the rupee and the forward cover over everything else. The
earlier roll-backs relating to the CRR have also not been withdrawn; so, it's unlikely that it may do so now." However, others are more cautious and say "it is difficult to say which way the wind is blowing". Adds an official with a leading merchant banker, "Short-term rates are already high and, hence, can be hiked immediately. However, we will have to wait for a week or so to discern whether the long-term rates will show an upward movement." Says another banker, "We will examine our long-term rates in the backdrop of the RBI package." Whatever the views, the fact remains that interest rates are facing an upward pressure. And, this time around it will not be the non-banking finance companies or manufacturing companies who will lure investors with high interests. The latest RBI guidelines have, of course, killed whatever hopes the NBFCs may have nurtured for mobilising deposits with higher rates. Even manufacturing companies, who are struggling to overcome demand slowdown and excess capacities, may not be
in a position to take advantage of the upward movement in interest rates. The obvious gainer are banks, both in the public and private sector, who will see money pouring in after the hike in term deposit rates. For the investor, this is good news. Not only does he get a higher yield, his investment will also be safe. After the CRB episode, investors have learnt that being greedy does not pay in the long-run; safety is as important as the return on their investment. Term deposits with banks are, of course, one of the safest investments. Even in private sector banks, both foreign and domestic, your money will be relatively more safe than any NBFC or manufacturing company. It may be recalled that in the post-CRB episode, banks benefited the most as depositors thronged their counters to park their money. While the extent of the interest rate hike will vary from bank to bank, analysts say it will range from 1.5 per cent to over 2 per cent. The short-term rates will go up almost immediately (in fact, most banksare holding high-level meetings to thrash out the new rates); for the medium-term and long-term rates to go up it will take more time. IDBI Bank has, for instance, already announced that it has hiked its term deposit rates across-the-board by 2 per cent. The new rates are 9 per cent for a 30-90 day deposit, 10 per cent for 91-181 days and 11 per cent for 181 days-1 year. IndusInd Bank, HDFC Bank, Centurion Bank, ICICI Bank, UTI Bank and a host of other private sector banks are likely to announce a two per cent hike in their rates soon. Institutions like IDBI and ICICI may also announce an across-the-board realignment of term deposit rates by 1-1.5 per cent soon. Most public sector banks, however, may wait for the State Bank of India before taking the plunge. With the 30-day term deposit being pegged to the bank rate minus two per cent, interest rates for this maturity will go up to a maximum of 9 per cent from the current seven per cent (five per cent for public sector banks). In fact, most private sector
banks, which generally offer higher short-term rates on account of their need for short-term funds, are expected to offer the most attractive rates. Long-term deposit rates of public sector banks can also be a good investment opportunity if the rates are in excess of 11 per cent. Apart from bank FDs, investors also stand to gain as the coupon on forthcoming debt issues is likely to be higher. Over the past few days, we have seen the coupon on a five-year paper moving up from 12 to 13 per cent. With the hike in bank rate, this is expected to improve further and will most likely settle around 13.5-14 per cent. Issues that have already hit the market may be in deep trouble if investors choose to stay away. Already, issuers who were planning to tap the private placement market at current rates have deferred their plans. Even the IDBI board is meeting in Mumbai today to decide whether to hike the coupon on its Flexibond-3 or lures investors with some kind of incentives. In the secondary debt market, too, the
time is ripe to pick up good AAA-rated instruments. The RBI announcement has triggered a selloff in the market and the prices of most securities have crashed by almost 6 per cent. The market favourite, 12.59 per cent government paper maturing in 2004, has seen its price tumbling from Rs 106 to less than Rs 99. With call rates expected to remain high, the prices of gilts and corporate paper will remain low and can give a good yield to investors. Adds a secondary market dealer, "The decision to hike the repo rate from 7 to 9 per cent is expected to be more of the academic nature as the call rate will be no where near this floor. Liquidity will continue to be at a premium."
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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