RBI on rupee vigil as foreign funds line up for Coal India

RBI on rupee vigil as foreign funds line up for Coal India

Mumbai: The Reserve Bank of India (RBI) will be on a strict rupee vigil over the next two weeks as foreign funds are expected to line up a deluge of dollars to get a share of the record $3.4 billion (Rs14,970.20 crore) initial public offering (IPO) by state-owned miner Coal India Ltd.

The rupee has already seen the initial impact of such dollar flows, climbing to a 25-month-high of 43.96 per dollar on Friday as foreign investors bought the Indian currency to prepare for the IPO that opens on Monday.

Bankers expect the rupee to gain at least 50 paise in the first three days of the week for which the IPO runs. That may force RBI to intervene to support the dollar and prevent a sharper rise in the rupee that could hurt exporters.

The rupee could rise to 43.20 per dollar in the first three trading days next week, testing RBI’s tolerance level, said Hemant Mishr, managing director and head of global markets, India, at Standard Chartered Plc.

“Foreign investor interest in this issue is massive. I expect a minimum of $4-6 billion to be invested in the market just because of this IPO," he said, adding that his estimates are that around $1.5 billion came in on Friday itself.

So far in 2010, foreign funds have invested $23.18 billion in Indian stocks, helping push up the rupee by 5.5%. Foreign investors are chasing higher returns in fast growing emerging markets as US and European economies struggle for recovery from recession. The foreign fund inflows are pushing up emerging market currencies.

The Singapore dollar climbed 1.2% last week to S$1.29 (Rs43.85), its best performance in six months, according to data compiled by Bloomberg. The rupee was the second best performer, gaining 0.8% to end at 44.10 per dollar after global funds pumped $1.8 billion into the stock market.

The latest spurt in the rupee is temporary, said Mohan Shenoi, treasurer at Kotak Mahindra Bank Ltd.

“We are expecting large inflows primarily due to the Coal India IPO and some part of this may even go (on) after the allotment is over, after which the rupee could reflect fundamentals like the current account deficit," he said.

Shenoi expects inflows of “more than $6 billion", “25% out of which has already come in last week."

He predicts the rupee will end the year at 45.50-46 per dollar, weakened by negatives such as the current account deficit that increased over the last five quarters to reach $13.7 billion in April-June.

RBI has hinted at intervention if the rupee’s rise continues, with governor D. Subbarao saying the central bank may step in “if inflows are lumpy and volatile" and disrupt the economy. “That remains our policy, but I cannot comment when we will intervene or when we will not," Subbarao said after the central bank’s board meeting on Friday in Chandigarh.

Mishr and Shenoi said RBI intervened in the market on Friday, ensuring the rupee ended below its day’s high.

Hitendra Dave, head of global markets at HSBC India, said that besides RBI action, there’s a possibility that oil marketing companies and other importers may buy dollars on expectations that the rupee’s gains are temporary.

“The rupee may trade below 44 per dollar, but this could be artificial and importers may see it as an opportunity to buy," he said.

RBI may also have to be vigilant after the Coal India IPO because funds that fail to buy the shares may choose to sell rupees to repatriate their dollars back home.

“So in that case RBI may also have to support the rupee or there is even a possibility that some of these funds may try to invest in Coal India through the secondary market," Mishr said.

Mishr expects the rupee to even swing to 44.80 per dollar on the downside in the next 15 days if funds pull out.

RBI’s job is also being complicated by more public sector share sales in the pipeline and calls for measures to control capital inflows.

Shipping Corp. of India Ltd is likely to sell shares before December, followed by Power Grid Corp. of India Ltd, Steel Authority of India Ltd and Indian Oil Corp. Ltd by the end of March.

Citigroup India economist Rohini Malkani, in a note Thursday, said India may tighten inflows into the country by limiting external commercial borrowing norms or lower interest rates on non-resident Indian deposits.