India’s surprise rate hike may undercut its biggest ever IPO

Will success come?
Will success come?
Image: REUTERS/Francis Mascarenhas
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The Reserve Bank of India’s (RBI) move to raise a key interest rate was necessary, but badly timed for the country’s largest initial public offer (IPO).

After two years of wait, the Life Insurance Corporation (LIC) of India finally kicked off its much-awaited IPO yesterday (May 4), with the government hoping to raise 21,000 crore rupees ($2.7 billion) over the next three days.

It has attracted massive interest from retail investors and the company’s policyholders. But its success will also rest on foreign institutional investors, and their response so far has been lukewarm.

On the second day of bidding today, the IPO was subscribed by 75%, with the policyholders’ quota being subscribed by 2.25 times and 68% in the retail segment.

RBI’s rate hike may erode listing gains

The rate hike soured investor sentiment, especially in the IPO grey market.

The grey market premium (GMP) is an indicator of the quantum of the IPO’s trade at the time of listing—the higher it is, the better the appetite among retail investors.

For LIC, the GMP peaked at Rs125 on day 1 of the offer but soon plunged to Rs86, reacting to the 40-basis point hike in repo rate (at which the central bank lends to the commercial ones).

However, analysts expect prices to recover to Rs130 by the time the offer closes.