'Forward Cover Move To Have Little Impact'
The move allowing foreign institutional investors (FIIs) to take forward cover from authorised dealers to the extent of 15 per cent of their investments, as on
June 11, is viewed by the FII community as the lone positive note struck by the package of RBI measures, with little actual effect.
While the intention of the Reserve Bank of India (RBI) seems to be to drive up forward premiums and thereby attract exporters to repatriate their proceeds, dangling the carrot of forward cover facility before FIIs is expected to have little impact for two reasons. Allowing forward cover in the current stock market situation will not enthuse FIIs to go in for it, since the cost of taking cover at the high premiums quoted at present does not make economic sense.
Top officials of Warburg Dillon Read, the investment arm of the new merged UBS AG Bank, said, while this was facility could be used up in later months, the impact may not be felt immediately and not all FIIs would take up huge positions at the moment.
``One may not envisage too much of volume in terms of FIIs using the forward cover facility immediately. The premium is too high at the moment and once they move down to realistic levels, FIIs could be seen availing of this facility,'' a Warburg Dillion official said. Moreover, top rung FIIs with large equity portfolios are willing to bear exchange rate risk and usually provide for a cushion in event of any depreciation.
"FIIs have already factored in the cost of doing business in India without the facility of a cover, so this measure is not going to make much of a difference," said Shailendra Bhandari, executive director of HDFC Bank.
The measure could also be viewed as a step towards capital account convertibility, ironically packaged along with measures that move away from it. `While FIIs may not go in for cover, providing more freedom is viewed as a positive signal by the market," said an FII source. For instance, allowing 100 per cent cover on incremental investments on June 11 levels was also viewed positively but did not see FIIs rush for it, either.
Sources also feel that the measures won't stop the FIIs from selling. "Though the strong rupee is a positive development for the stock market, it cannot check FII sales in any way. For one, most foreign funds are selling due to reasons other than the rupee. Some of the foreign funds are facing redemption pressures abroad, while others are moving out of emerging markets altogether," said a source.