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Money Grows Faster In Short Term

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Yashajit Saha MUMBAI
Last Updated : Aug 30 2000 | 12:00 AM IST

If you are a high net worth individual, don't commit your money for one year and above. Put it in the shortest possible term deposit (read between 15 and 30 days) and roll it over till such time the shorter end of the market is volatile.

The net gain? Shortest term deposit offers you the maximum yield "" about 12 per cent "" while the yield on deposits of one year maturity is in the range 10.5 per cent to 11 per cent. Some of the banks even have recently introduced five-year deposits but there are no takers as nobody is willing to lock in money for such a long period for 12-13 per cent, the same yield offered by 30-day deposits.

Even some corporates seem to be taking advantage of the inverted yield curve and making a cool spread by investing the funds in short term deposits drawn from their cash credit limits at lower rates.

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The situation is likely to continue till such time the Reserve Bank of India keeps its repo rate unchanged at 14-15 per cent and the call rates are hovering around the same level.

Says the treasury head of a private sector bank: "The high rates in the overnight call market has pushed up the short-term rates of all instruments and banks' deposit rates have moved accordingly." Adds a dealer at a new private sector bank, "all the activities are in the money market are at the short end, and hence the hike in the interest rates at the short end is also higher than at the long end."

Dealers, however, think that the "inverted yield curve" is a short term phenomenon and is likely to be corrected soon as uncertainty in the forex market seems to be over. A senior banker with a private sector bank says: "It looks like that the fall in rupee is checked for the time being and we expect that Reserve Bank to reduce the repo rates after watching the market cautiously for a few more days."

Bankers accept the theoretical possibility that corporates can take advantage of high short-term rates. Chief dealer of a private sector bank says: "In a volatile market situation, these sort of opportunities always exist and some of the corporates might be taking advantage of it."

However, a section of market suspects that with the limited source of finance at low interest rates, there is not much of scope for such profit-making activities. "The stock market is not performing well, commercial paper (CP) market is dull; playing with cash credit limit is not a plausible strategy in such a situation," says a dealer.

However, some of the cash rich corporates believe in making the most of the situation.

"When we can make a cool spread without any risk, what's the harm in doing so? Our treasury operations should be sophisticated enough to take advantage of any given situation," quips the finance director of a corporate under condition of anonymity.

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First Published: Aug 30 2000 | 12:00 AM IST

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