In IPO season, rupee caught in the middle of global and local pull

Foreign money is pouring into India when the US dollar is gaining strength against emerging markets currencies.

Two opposite forces are at work to keep the Indian rupee trading on a narrow, stable course: a trend that should continue for now, say currency experts.

Foreign money poured in for the initial public offering of Zomato IPO, which marks a pipeline of more big-name IPOs. At the same time, the US dollar is also gaining strength against emerging markets currencies after the Federal Reserve indicated at least two hikes by 2022. A renewed surge of Covid-19 infections is keeping global risk appetite at bay.

The situation is a dilemma for the Reserve Bank of India (RBI). If it lets the rupee appreciate following the dollar inflow, when other peers are depreciating, India’s export competitiveness will suffer. The rupee has moved sharply since June, and there are predictions of the currency hitting 76 compared to the dollar. That level would also be in line with how the Asian currencies have been depreciating.

A weak local currency will also certainly lead to outflow, as investors would be able to repatriate less of their local earnings.’

The RBI would most likely be to strike a balance. With that in mind, the central bank has stepped up intervening in the market in the last few days.

“RBI was buying the dollar all along in the spot market, and releasing rupee liquidity. This excess liquidity will certainly not let the rupee appreciate a lot,” said Imran Kazi, vice president at Mecklai Financial, a currency consultant.

Kazi expected inflows to continue because of a series of IPO lined up. The markets would be looking at the ‘dot plots’ more than anything else “and that should be pro-dollar from here on,” he said.

There are two opposite forces at play.

The US Federal Reserve’s ‘dot plot’ indicates that there could be at least two rate hikes by the end of 2022. A surge in Covid-19 infection has also given rise to risk aversion across the board.

Asian currencies have weakened since mid-June when the US Federal Reserve announced its intention to unwind accommodative policies. Fed Chair Jerome Powell has sounded dovish since then, but currencies have not scaled back much. From about 73 a dollar level on June 9, the rupee crossed 74 by 17 June. On Friday, the local currency had closed at 74.56 a dollar.

But the IPOs could exert an opposite pressure for the rupee to appreciate, RBI would want to mop up the flows and boost its reserves further, as Governor Shaktikanta Das sees reserves as the best safety net for the emerging markets.

The capital flow has been strong in India in the past year. In fiscal 2020-21, net FPI flow was $36.18 billion. This fiscal, the strong flow has been tapered by debt outflow, but the net is a positive $137 million still. Foreign direct investment (FDI) has been the highest ever at $81.72 billion in 2020-21. The RBI soaked up all this money, boosted foreign reserves by more than $100 billion to a record $611 billion-plus.

The local currency could have depreciated more, and analysts were predicting 76 a dollar even, but dollars started pouring in after the Ant group-backed Zomato announced its IPO plans. The offer was oversubscribed 38 times. Qualified institutions buyers bid more than 50 times the quota reserved for them. The IPO was oversubscribed 38 times.

The excess money will return now, putting some pressure on the exchange rate, but they will again come back with the new IPOs in place.

Among IPOs lined up in July and August are Pepsico-bottler Devyani International, Paras Defence and Space Technologies, Go Airlines, Seven Islands Shipping, Aadhar Housing, ESAF SFB, etc. and in the coming months, several big IPOs are expected such as Star Health, and even Life Insurance Corporation of India.

These IPOs will continue to attract big foreign money, keeping the rupee well supported, currency dealers say.

“If the RBI continues to play its part to curb volatility downside, any dips in the dollar-rupee pair would be taken for buying by importers, and while for exporters, it would remain sideways to sell,” said Amit Pabari, managing director and CEO of CR Forex.

“So far, the rupee has been supported by the inflows pertaining to IPO’s. If inflows get standstill, a depreciation pressure resides on the rupee and can take it towards 75.20-75.50 levels in the upcoming time,” Pabari said.

All the same, “downside in the dollar is likely to be limited in the coming week,” said Abhishek Goenka, MD, and CEO of IFA Global.

“Rupee is likely to continue to outperform compared to Asian peers as India would continue to be the preferred destination for carry (trade) given that the COVID situation is not as alarming now as compared to earlier,” Goenka said.