Foreign inflows via TCS float unlikely to prop rupee

The massive foreign investment expected in Tata Consultancy Services' (TCS) public offer over the next few weeks is unlikely to boost the rupee, foreign exchange dealers said this week.

Strong demand for foreign exchange from Indian importers is expected to easily absorb the $500 million or more investment from overseas in India's largest-ever initial public equity offer.

TCS, which is the country's largest software services company, has earmarked roughly 60 per cent of its 55.4 million, Re 1 face value, shares for the so-called qualified institutional investors who include foreign institutional investors. The offer includes a greenshoe offer of over 8.3 million shares.

The 100 per cent book-built offer, priced between Rs 775 and Rs 900 a share, opens Thursday and is due to close on August 5. Roadshows in India and key overseas markets have begun.

The issue's managers declined to estimate the likely foreign investment.

Forex dealers are preparing for a large inflow from investors next month, although most believe it won't inject volatility in the rupee's exchange rate.

Dealers at a French bank and a US bank here forecast that at least $500 million from abroad would be invested in TCS. It could be some 40 per cent more too.

The impact of the inflow would depend on sentiment prevailing then, they said. "It depends at what level the market is when the money comes in," said the French bank dealer. If demand for the dollar is as strong as it is currently, then the $500 million wouldn't even cause a ripple, said a dealer.

The rupee, most dealers predict, would remain weak because foreign exchange demand of importers will remain stronger than supplies from export earnings and investments in equities from overseas.

In the quarter ended June, the gap between imports and exports widened to $5.9 billion from $4.3 billion a year ago.

Although export growth is robust at 28 per cent, imports are picking up because of a revival in industrial demand and also because of the higher costs of crude oil imports.

In the same three months, foreign institutional investment in equity was roughly $260 million, less than 30 per cent of the investment a year earlier.

It is in this scenario that some in the market now see the rupee weakening to Rs 46.50 per $1 in the next one week. Today, it was at Rs 46.21 per $1 compared weaker by roughly Rs 2 three months ago.

At best, the TCS investment could, briefly, slow the rupee's decline. "At the most, the rupee will come back to 46.25 owing to the TCS inflows from 46.50," the US bank dealer said.

If that happens, the dealer expects importers to take the marginal rise in the rupee as an opportunity to cover non-hedged dollar positions, that is buy dollars in the forward market to pay for future imports.

However, if TCS chooses to bunch the foreigners' investment into a single remittance, there could be a blip.

"There will definitely be a significant impact if the full amount comes in a day. But if it is distributed over 2-3 days then the market will absorb it," said a dealer with another US bank.