| Coal India IPO Will Ease Up Monetary Conditions, Lead To Rupee Appreciation, Raise India share in incremental FII Equity Investments-Globally and On a India Specific Basis At first glance, this suggests that the total liquidity impact could be of the order of Rs 1.5 lakh cr. However it is important to keep in mind that much of the FII bids will be financed through fresh inflows into the country (though some part of this could be financed by existing positions in India).The assumed FII bids of Rs. 70,000 cr. imply an inflow of up to $ 15.5 billion for the duration of the IPO. This is almost as large as the total FII inflows so far this year. About 90% of any inflow would flow back at the end of the IPO period. What implications does this have for the forex market and the domestic money market? For the impact on the foreign exchange market, it might help to look at another contemporary case: the $70 billion share sale of Petrobras, Brazil's state owned oil giant. The central bank there has been intervening steadily in the foreign exchange markets to absorb over $1 billion daily in an effort to mop up the excess inflows. Despite the heavy intervention the currency has appreciated by over 3% over the past month. The Reserve Bank of India too could intervene to absorb the inflow and outflow to smoothen the impact on the currency. Nevertheless it is possible that there could be some temporary volatility / strength in the currency during this period.
A large inflow of $15 billion / Rs 70,000 cr. would have a large impact on the money market liquidity. Repo balances show that the banking system is currently borrowing about `. 63,000 cr. from the RBI (average for the last week). During this IPO period, it is likely that the system liquidity will ease considerably or turn positive. Even after the outflows, there would be a positive impact of about Rs. 7,000 cr. to system liquidity due to the FII subscription. |
The larger impact of the Coal India share sale would be seen over the next few months as the stock is added to major indices and would add to the overall capitalization of the market. The size of the IPO and potential inclusion in indices would themselves be reasons for strong FII participation. As the stock is added to global indices, the resulting higher India weight could structurally add to fund flows into the market.
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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