LIC IPO delay -ve for rupee, may hike yields in FY23 - Times of India

LIC IPO delay -ve for rupee, may hike yields in FY23 – Times of India


MUMBAI: Postponement of the initial public offering (IPO) of insurance major LIC to the next fiscal could affect bond prices then and would also be a negative for the rupee, which is under pressure because of the war in Europe.
The government on Wednesday raised Rs 38,000 crore, compared to Rs 26,000 crore it had planned earlier, ostensibly to make up for delay in collections from the LIC IPO. In February, it had also cancelled two scheduled government securities’ (G-secs’ )auctions aggregating Rs 48,000 crore. Market players now feel that the Centre may meet this year’s funding targets by raising higher amounts through the four remaining treasury bill auctions this month.
“Postponement of the LIC IPO could add pressure on the rupee, which is already under strain because of the war in Europe. After the LIC IPO was announced, FIIs had taken positions in the offshore forward market in anticipation. They may now reverse the position,” said K N Dey of United Financial Consultants, which advises businesses on foreign exchange. The rupee did breach 76 in the offshore forward market, but was firmer in the spot markets. It ended at 75.71 compared to the 75.34 close on February 28.
“The delay in LIC IPO may not lead to a spike in bond yields but, combined with rising crude oil prices, that may force the government to cut duties on it and lower taxes on petro products, there could be spike in 10-year yields next month onwards,” said a debt market player. A cut in fuel taxes to control prices may result in higher borrowings in 2023.
In the forex market, the LIC offer was expected to bring in foreign flows upwards of $4 billion. According to CR Forex MD Amit Pabari, the postponing of LIC IPO will not have any direct impact on the rupee’s value since, in order to prevent sharp appreciation in the (rupee-dollar rate), the RBI has announced a sell-buy swap. The only impact in foreign exchange market can be that the forward premium, which has gone to 4.1% (for 1 year) will come back to about 3.8% level,” Pabari said.The forex market is more concerned by the war in Europe and not much by the delay in LIC offer, agreed Abhishek Goenka, founder of the forex advisory firm IFA Global. “Three-month implied volatility (for some derivative contracts) are trading significantly higher at 6.18%, indicating that the market is nervous about rupee depreciation in the wake of the Russia-Ukraine war,” he said.
Dey said, “The war is hurting on multiple fronts — every dollar increase in crude adds $1.25 billion to the trade deficit. Add to this the increase in commodity and cooking oil prices. If the war does not end, I fear the rupee may test new lows.” Since the war started a week ago, the rupee has depreciated by less than 3% to Wednesday’s close at 75.71-per-dollar, which market players feel are within reasonable levels.


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