With inflation hitting a 17-year low of 1.83 per cent, real interest rates have reached double-digits. Corporates have started clamouring for lowering interest rates, but banks were unwilling to oblige till deposit rates come down. But now with Bank of India slashing its deposit rates by 50-100 basis points, analysts say an interest rate cut could well be on the cards. IDBI Flexibond VII will be a major beneficiary of such a move as investors wouldflock to park their money at 12.5 per cent per annum.

It may be recalled that IDBI Flexibond V reaped windfall gains thanks to the cut in small savings rate and the 10-day moratorium on investments like NSC, post-office schemes, etc. As Flexibond V was open for subscription for most part of the moratorium on small-savings, applications poured into offices of IDBI. Attracted by the 14 per cent per annum offered by IDBI, people rushed to avail of the high yields. The result: An oversubscription of almost 200 per cent. Similarly, Flexibond VI was oversubscribed thanks to the RBI's announcement of cuts in bank rate, repo rate and the cash reserve ratio. The subscription crossed the Rs 1500-crore mark thanks to the attractive yield in the light of the cut in interest rates. Flexibond VI was launched on February 22, while RBI announced its decision to cut rates March 1. ICICI, which hit the market with a retail bond issue at the same time cut the yield on one of its instruments by 25 basis points, while IDBIdecided against any revision in coupons.

This time too, the financial institution may prove lucky if the Reserve Bank cuts interest rates. Adding to the pressure on lowering of interest rates are reports which suggest that the economy may witness a zero-inflation within a few months. Investment bankers say that with the economy showing signs of a pick-up, it would be a good move for RBI to cut rates in order to further bolster the economy. However, there are a few who say interest rates will come down only in the long-term, while in the short-term they will remain stable.

According to IDBI officials, ``Brokers as well as sub-brokers have been told to highlight the impending interest rate cut to investors. In the light of IDBI's not-so encouraging financial performance in 1998-99, the probability of an interest rate cut has to be aggressively sold in order to rake in a good subscription.'' On offer from IDBI this time around are Regular Income Bonds, Growing Interest Bonds, Deep Discount Bonds andRetirement Bonds. The latter had proved a big draw last time around, and, hence its inclusion in Flexibond VII.

The return of the Deep Discount Bond is surprising as IDBI had dropped the same from its previous two bond issues. The reason was the waning appetite for DDBs in view of the CBDT clarification regarding tax treatment on the difference between the redemption amount and issue price. This time around, however, IDBI has included the DDBs as part of its Flexibond VII. The face value of each bond is Rs 29,500 while the issue price is Rs 5000. The tenure of the bond is 15 years, which gives an yield-to-maturity of 12.55 per cent.

It's advantage IDBI

For those seeking higher returns, opt for IDBI Flexibond VII instead of ICICI Safety Bonds July `99. The Regular Income Bond from IDBI offers an yield of 12.5 per cent for the annual option as against ICICI's 12.3 per cent. Even in the monthly option, IDBI scores with an yield of 12.4 per cent compared with 12.1 per cent in the ICICI Safety BondsJuly 1999. In the step-up bonds segment, IDBI offers 25 basis points more than ICICI in the first year, but ICICI offers more in the second and third year. One area where ICICI scores over IDBI is the tax-saving instrument which offers benefits under Section 88, 54EA and 54 EB.