Losing Interest

Falling interest rates, and hence yields, are putting off retail investors from the debt market that seemed attractive just last year .

The year: 1996

Scene I: A debt broker's office in south Mumbai.

Time: Lunch hour

Activity: Channelling resources from the savings sector to the investment sector.

Around 60 people are crowding the 250-square feet office and the passage outside. Animated talk about whether Malhotra thi-nks ABC Finance fixed deposits are better than XYZ Finance. Malhotra, a public sector bank officer, is taking a 1-year fixed deposit. He says: ABC Finance is offering 18 per cent interest with an incentive of 3 per cent. XYZ is offering 19 per cent with an incentive of 2.25 per cent.

 

Both these issues belong to junk companies and they may not be around a few years down the line. But Malhotra's immediate concern is that he is getting a toaster on a Rs 25,000-deposit on ABC against a thermoflask on XYZ. His old toaster needs retirement.

Scene II: A conference room at a 3-star hotel.

Activity: Channelling resources from the savings sector to the investment sector.

A senior official of a financial institution is making a presentation to the packed gathering. He explains the different products and the type of investor that each bond is designed for. The purpose, of course, is to increase investor awareness. He is more than confident that the issue would be oversubscribed.

Nineteen ninety-six was clearly the year when both institutional investors and the retail investing community fell in love with debt instruments. Their insatiable appetite ensured that dozens of debt issues flooded the market, and in most cases, were heavily oversubscribed. The love affair had much to do with the fact that the equity markets had remained cold for well over two years