Retail market: Greater activity expected

Suresh Krishnamurthy

NOW that the interest rates have indeed gone up, activity in the fixed deposit market can be expected to hot up. In earlier years, the coupon rates on offer in the fixed deposit market were traditionally lower than that in the bonds market. However, with improved liquidity in the system and a booming private placement market along with boosters, such as the tax sops to mutual funds, companies found it a paying proposition to raise money from the private placement market. Now, interest rates in the private placement market have already gone up and, consequently, the retail fixed deposit market appears to be an attractive source of cheap money.

There are already indications of major companies tapping the retail market. For example, IFCI has announced its intention to market its fixed deposit programme. Also, advertisements on ICICI's FD programme, which were conspicuous by their absence earlier, have now started appearing. IFCI is expected to raise money at 11.25 per cent for a five-year deposit compared to 12.1 per cent from the private placement market.

Also, the ICICI offers 10.5 per cent on three-year deposits -- a rate at which it would be hard-pressed to raise one-year money from the private placement market. Even adding costs such as commissions and margins, the cost of raising money from the retail market is likely to work out cheaper for these corporates. Also, raising money from the private placement market would involve offering options such as puts and calls.

For example, the IDBI offers a three-year bond with a put option at the end of one year at an yield of 11.40 per cent. For raising funds from the fixed deposit market, such options need not be incorporated into the instrument. And when rates rise in the retail market, the corporate sector is likely to switch allegiance to the private placement market.

However, investor reaction to these marketing campaigns should be exactly the opposite. It is perhaps the right time for investors to participate in the private placement market. Retail investor participation in the private placement market is possible through the mutual funds route. And when interest rates trend down, the net asset value of mutual funds would rise, resulting in capital appreciation for investors.