According to merchant banking sources, the issue was able to garner close to Rs 900 crore on the first day itself and is expected to close on Tuesday.The interest rate war among financial institutions (FIs) is once again out in the open with IDBI offering higher yield on its debt paper compared to papers of similar maturity floated by the Housing Development Finance Corporation (HDFC) and Export-Import Bank of India (Exim Bank).

IDBI plans to raise Rs 1,200 crore offering two papers of 63 and 87 months. The core issue of Rs 600 crore carries a greenshoe option of an identical amount.

Housing finance major HDFC is planning an eight-year bond issue of Rs 250 crore (including a greenshoe option of Rs 100 crore). The band for the issue-to be raised through book building-is fixed at 11.95-12.10 per cent.

The HDFC paper is structured in such way that 30 per cent of the issue is redeemable after the sixth year, 40 per cent after the seventh year while the balance will be redeemed after the eighth year. In comparison, the 87-month (more than 7 years) option in the IDBI paper gives the investor an annualised yield of 12.3 per cent, which is 20 basis points above the higher-end of the HDFC issue. IDBI's pricing is 94 basis points above the current yield of 11.09 per cent on government paper of the same tenor. This is HDFC's third borrowing programme this fiscal. It has mopped-up Rs 125 crore through two tranches of Rs 75 crore and Rs 50 crore since November, 1999.

The 63-month option in the IDBI bond offers an yield of 12.1 per cent, which is approximately 20 basis points higher than interest rate offered by Exim Bank on its five-year option for the Rs 700-crore bond issue. The pricing is 32 basis points above the current yield of 11.78 per cent on government paper of similar tenor. The issue is open to institutions, banks, mutual funds, corporate houses and high net worth individuals.

The sudden rush by FIs to raise debt is apparent on account of a fall in benchmark interest rates since the money markets are flush with liquidity.

The RBI is treating cash in bank vaults as cash reserve ratio (CRR) balances between December 1 and December 31. This has enhanced the liquidity levels in the system by Rs 4,500 crore.

It has also decided to offer special liquidity support to banks at 10.5 per cent (two per cent over bank rate) during the millennium transition period against their excess holdings of treasury bills and government securities.

Coupled to this, the CRR cut in November has infused more than Rs 8,000 crore into the system. This surge in liquidity has led to a fall in call-money rates below the crucial 8 per cent mark and a surge in prices of government bonds.