Corporates also fear that with the Reserve Bank of India signalling a high interest rates scenario in the medium term, their domestic borrowing programmes will be affected.

Merchant bankers are advising corporates to hold on to their bond plans and bankers said that the five-year Indian Rayon bond issue priced at 13.50 per cent will face a tough time. The AV Birla company's debt instrument has received a triple-A (AAA) rating.

"Corporates will have to dole out more if they want to borrow," ICICI Bank executive vice-president PH Ravikumar said. Merchant bankers said that the corporates will have to price their new five-year issues at 14.20-14.50 per cent if they want banks to invest in the instruments. "The spreads between the gilts and triple-A ratedcorporate papers have decreased after the five-year auction. They have to increase now," a banker said.

The RBI signal of a steep increase in the medium and long term has sparked off fears of heavy depreciation in the securities portfolio for banks. "At the beginning of the year, the RBI auctioned the five-year paper at 11.10 per cent. Now it has auctioned the same maturity paper it at 11.75 per cent. At this rate we will end up booking heavy losses at the end of the year," a treasury chief in a leading private sector bank said.

Most foreign and private sector banks invest in short- and medium-termsecurities. The RBI had pegged the yield to maturity (YTM) of the 10-year paper at 12 per cent and at the "on tap" auction it has raised the coupon to 12.10 per cent. The 12-year paper's coupon has been further raised to 12.25 per cent. "It is clear that long-term interest rates are on the rise. We will not invest in government securities if we are required to create provisions for depreciation on securities," adealer in a public sector bank said.

The government has already completed Rs 41,000 crore of borrowing out of a gross borrowing plan of Rs 79,000 crore during fiscal year 1998-99. The net borrowing programme has been pegged at Rs 48,000 crore. The Reserve Bank has already taken Rs 16,000 crore on its books on account of devolvement and private placement of various securities by the government.

During the fortnight ended June 5, investments in government securities by banks have gone up by Rs 5,727 crore to touch Rs 2,36,301 crore. With bank credit taking a dip and falling by 0.1 per cent during the fortnight, investments by banks have gone up by 2.5 per cent during the same period.