Apprehension remain over volatility of Rupee
By R Chandrasekaran
CHENNAI: The government’s plan to divest its holdings in public sector companies may face strong headwinds in case foreign institutional investors (FIIs) chose to remain on the sidelines for fear of margin erosion. The significant slide in the Indian currency in the last one month has further dampened the spirits of FIIs. The possibility of postponing some of the big companies’ share sale is also not ruled out.
The Indian government is planning to generate Rs.400 billion from the sale of shares it holds in companies like Indian Oil Corporation, Coal India Ltd. and Neyveli Lignite Corporation.
The recent response to the issues of Hindustan Copper and Minerals & Metals Trading Corporation Ltd. (MMTC) also suggests that domestic institutions like Life Insurance Corporation and banks had to bail out those issues. It is quite likely that domestic institutions may not be in a position to bail out big issues and they cannot be expected to rescue every time.
The current market price of Hindustan Copper and MMTC are also below the offer price. Now that the Rupee is trading weak, the FIIs seem to fear that their margins will further erode as the Indian currency had lost about ten percent in the last one month alone.
The FIIs have also seemed to have aired their apprehensions to the finance ministry about the volatility of the rupee and the poor performance of Hindustan Copper and MMTC in the bourses. A finance ministry official has reportedly viewed that they are finding it difficult to convince the FIIs at this point of time due to combination of unfavorable factors.
The comments made by the U.S. Federal Reserve Chairman Ben Bernanke that it will stick to the earlier plan of rolling back bond buying program and is keeping other options open also assumes significance. The tapering of bond program will likely result in flight of money from the emerging markets to the U.S.
Given the official line of thinking that disinvestments money receipt is not linked from the fiscal deficit, it is quite possible that the government will not be averse to postpone some of the bigger issues to attract FIIs interest since their net outflow is estimated at about Rs.145 billion following the Fed hints on bond buying program on June 19.