The RBI has also stated that the forward cover facility will be increased to cover additional investments in future. "Over a period of time, it is proposed to gradually extend the facility of forward cover to the existing investments of FIIs in the equity markets. Initially, ADs (authorised dealers) will be allowed to offer forward cover facility to FIIs to the extent of 15 per cent of the value of their investments as on June 11, 1998," an RBI announcement said.

Participants expect an increase in FII activity in the forward market. The FIIs are yet to take forward contracts for any substantial amounts as the stock markets have registered very little appreciation since June 11.

Fresh purchases by FIIs have not amounted to much asthey have been net sellers for most of the days on the bourses since June 11. The rupee, too, was stable from June 11 till the second week of August before it came under selling pressure following the weakness in the Japanese Yen.

Following Thursday's announcement, many of the old FII funds are likely to take forward cover on some portion of their earlier investments. A handful of them had been taking forward cover in the non-deliverable rupee forward (NDF) market abroad on their Indian equity exposure as they were not allowed to do so in India. The forward premium in the NDF market is expected to come down following the RBI announcement. The NDF market premium is often substantially higher than that available in the Indian forward market.

FIIs are not expected to take forward cover with immediate effect as the forward rates shot up on Thursday after the RBI announcement. This is expected to be a temporary phenomenon which may last for a week.

Marketmen say the high forward rate on Thursday is primarilydue to the sudden reversal of trading position that banks arbitraging between the domestic call and forex market had to take after the RBI announcement. FIIs may wait for the six-month forward rates to come down to around 7-8 per cent before they take cover.