IPO season is going on and a lot of people asked to explain how IPO related flows impact local currency and what's the difference between bringing dollar on outright basis vs on hedged basis. Here's an attempt by us at @kotaksecurities.
There are two parts to any IPO - anchor book, which opens one day prior to IPO (Nov 3) and second is, book building portion (Nov 8-10), when IPO goes live. These dates are for Paytm IPO.
In case of Paytm IPO, it is India's largest IPO at 18.9K crs and so is the anchor book, which is approx 8.5k crs. Since 1/3rd of anchor book to be allocated to MFs, net anchor book for FPIs is 5.7k crs. All these numbers are calculated at higher price of the range - 2150.
Since IPOs are time abound exercise spread over 4-5 days, excluding holidays, it has impact on local currency, if they attract decent interest (flows) from foreign investors. Today, rupee is seeing downward drift and looks to be largely on account of IPO related flows.
As stated in the past, now a days, flows related to anchor investor portion seems to have bigger impact on INR than book building portion, as in anchor book, FPIs bring dollar on outright basis, while in later, large part of the flows may come on hedged basis (sell-buy swap).
Sell-buy swap is a strategy where FPIs sell USDINR, say today, to buy it later, say 6/7 days, by paying the premium amount. In this, since one is doing both the buy and sell at the same time, there is no impact on spot; against outright, where one just sells dollar. 💰
In book building portion, since it is not clear how many times the IPO is likely to be subscribed, foreign investors prefer to do sell-buy swap, so that if he/she gets just 10%-20% of the total allocated amount of total bid, there is no FX risk on the rest of 80%-90% amount.
Against this, when one bids in anchor book, foreign investors in general have a fair idea that how much is the likely allotment. Hence they bring dollar only to that extent, but on outright basis, thus having larger impact in USDINR, which we are most likely seeing today.
The impact also depends upon the size of IPO, both book building and anchor.
Sometimes, we may see the impact on USDINR during book building portion as well if foreign investors bring lesser amount of funds on hedged basis. But in general, no one wants to take un-necessary FX risk.
Imagine, one brings in $100 mio dollar at 75 for IPO and gets allotement only for, say $20 mio and by the time, reversal happens 6-7 days later, USDINR moves up to 75.50. One ends up getting hit on $80 mio, against just paying 0.06/0.07p premium under sell-buy swap.
That's why it is always better to be hedged, even when doing any trading strategy, than going naked (not hedged).
Hope this helps to make things clear around IPO related flows. Since, we are having slew of IPOs lined up, one needs to keep these things in mind. But equally important to understand, the size and interest from FPIs. We may not see similar interest in all IPOs.
Finally, it is also important to understand , esp. in tech IPOs, if any of the foreign investors exiting and what is the quantum. If it is large, it can have impact on other side of #USDINR. Look for one.
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