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LIC IPO: Rate hike causes grey market premium to plummet by 30%

Market watchers expect it to recover in a day or two

May 04, 2022 / 10:34 PM IST
The repo rate hike came after four years, after the Monetary Policy Committee meet this April decided to do away with forward guidance. (Photo by NIKOLAY OSMACHKO/Pexels)

The repo rate hike came after four years, after the Monetary Policy Committee meet this April decided to do away with forward guidance. (Photo by NIKOLAY OSMACHKO/Pexels)

There is a meme that is doing the rounds. It is a famous scene from the superhit movie Baahubali. In it, a trusted friend Kattappa literally stabs the hero Baahubali in the back. 

In the meme, Kattappa was labelled the surprise rate hike by the Reserve Bank of India (RBI) and the betrayed hero was labelled the Life Insurance Corporation (LIC) IPO. The meme was eloquent.

Also read: LIC IPO: Live coverage of the biggest issue in the Indian history

The shock of the rate hike was felt most keenly in the IPO grey market. 

The grey market premium (GMP) for the LIC shares was on a steady climb since yesterday–from Rs 72 to Rs 85 to Rs 105. It peaked at Rs 125 today, on the first day of the IPO opening. But, after the central bank announced a rate hike of 40bps in the repo rate–from 4 percent to 4.40 percent--the GMP crashed to Rs 86. The hike came after four years, after the Monetary Policy Committee (MPC) meet this April decided to do away with forward guidance and allow the central bank the flexibility to respond faster to economic conditions.

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Following today’s announcement, of the rate hike and of the increase in cash reserve ratio (CRR) by 50 bps, the Sensex tumbled by over 1,300 points. The higher cash reserve ratio is going to suck out Rs 870 billion worth of liquidity in the economy, according to Nomura. 

The hikes seem to have soured the market sentiment.

But, the prices of LIC aren’t expected to stay subdued for long. According to Suvajit Ray, head of product and distribution at IIFL Securities, the prices will start recovering by tomorrow.

“Usually, the QIBs (qualified institutional buyers) come in after two days. But this time, the QIBs’ section has been subscribed by 33 percent already. That is huge. Also the retail sections did very well… By Friday and Saturday, it (GMP) should recover to Rs 130,” he said. 

The QIB and retail buying draws the non-institutional investors (NIIs) or HNIs, and NIIs are the ones that really drive the GMP, according to him. “Whenever the NII section is oversubscribed 1.5x or 2x, the grey market premium shoots up. The NII has already been subscribed by 27 percent,” he said.

Right now, the market sentiment is subdued because of the rate hikes and the liquidity being drained out because of the CRR ratio and the huge IPO buying.
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