The term lending institution plans to raise Rs 300 crore in the private placement market. The institution raised over Rs 500 crore in the retail market on March 23. The five-year money was raised by ICICI at 14 per cent -- 100 basis points higher than the current offering.

Merchant bankers said that the five-year government paper, which saw a cut-off yield of 11.10 per cent on Monday, has set the benchmark for all corporate and institutional debt issues in the new fiscal. Sources pointed out that the spreads between the corporate bond and government of India securities (GoI) will go up by 100 basis points to 300-325 basis points in the new fiscal from 200-225 basis points in 1997-98.

This is amply illustrated by the pricing of the current ICICI issue, which hit the private placement market early this week. The institution is offering 13 per cent forits three-year paper, while the five-year paper will carry a coupon of 13.50 per cent and the seven-year paper has been priced at 13.75 per cent (annualised).

The difference between the five-year government paper and a similar maturity corporate bond has widened by about 260 basis points -- up from the previous year's spread of 200 basis points.

"The widening in the spread is bound to happen as the corporates will have to pay a premium on the liquidity prevailing in the market," a merchant banking source said. This, in effect, means that the market is expecting the cut-off yield on GoI securities to come down further, while the coupon rates on the corporate debt will continue to remain the same.

Merchant banking sources said that a number of corporates are looking at raising debt in the private placement market. Sources said that the massive government borrowing programme of Rs 55,000 crore (net) will lead to a crowding out effect and interest rates in corporate debt are likely to go up considerably.While the RBI wants the interest rates to stay on the lower end, the huge government borrowing programme is likely to unsettle its plans to keep interest rates lower.

"If the RBI continues to borrow around Rs 10,000 crore every month, it will be difficult for corporates to meet their borrowing programme as it will lead to a crowding-out effect.

The RBI should allow some money to flow into the system so that corporates can raise money to meet their requirements also," a merchant banking source said.