The gray market premium dropped 30% as a result of the rate hike

The gray market premium dropped 30% as a result of the rate hike

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.

There is a viral meme going around. It’s a well-known scene from the blockbuster film Baahubali. In it, the hero Baahubali is stabbed in the back by a loyal friend named Kattappa. Kattappa was dubbed the Reserve Bank of India’s (RBI) sudden rate hike, while the betrayed hero was dubbed the Life Insurance Corporation (LIC) IPO in the meme. The meme was well-written. The rate hike’s impact was felt most acutely in the IPO grey market.

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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