Investors were not encouraged by April’s Indian balance of trade, with the deficit found to have widened further than forecast on the month. This weakened confidence in the strength of the domestic economy, prompting a fresh round of Rupee selling. Demand for the risk-sensitive Rupee was also weighed down by the jitters surrounding political developments in the US, which saw the White House facing a fresh scandal over the sacking of then-FBI Director James Comey. With the odds of Trump delivering on his promised infrastructure investment and tax reforms seeming to weaken the mood towards the emerging-market currency dimmed.
GBP INR Weighed Down by Rising Inflation
The Pound came under pressure, meanwhile, as April’s UK inflation data surprised to the upside. Inflationary pressure was found to have accelerated from 2.3% to 2.7% on the year, showing no signs of slowing at this juncture. Even so, given the reticence of the Bank of England (BoE) this stronger showing did not seem to improve the likelihood of the central bank returning to a tightening bias in the foreseeable future.
As weekly earnings failed to pick up in the three months to March this saw UK real wages continue to fall. Given that much of the recent resilience of the economy has been thanks to high levels of consumer spending this dented the appeal of Sterling further. With consumers likely to rein in their finances as inflation continues to eat into earnings the outlook did not appear overly positive, keeping the GBP INR exchange rate on a weaker footing.
However, a rallying point was in store for the Pound on Thursday thanks to unexpectedly strong April retail sales figures. As sales rose 4.5% on the year this gave markets fresh cause for confidence in GBP exchange rates, suggesting that consumers have yet to feel the sting of rising inflation. While this momentum is unlikely to last in the coming months as the wage squeeze tightens the bullish result nevertheless boosted the appeal of Sterling.
Improved Risk Appetite Boosts Rupee
Even so, while oil prices remained on an uptrend demand for the Rupee strengthened somewhat on Monday. Despite an absence of fresh Indian data investors were encouraged to pile back into the risk-sensitive Rupee thanks to the persistent softness of the safe-haven US Dollar. With the Federal Reserve looking less likely to raise interest rates at its June policy meeting the appeal of higher-yielding currencies improved once again, especially as the sense of political risk died down.
The GBP INR exchange rate was also pressured at the start of the week by news that the Conservatives’ lead in the polls had narrowed to just nine points. This was a rather dramatic narrowing, throwing into doubt the market conviction that Theresa May will cruise to victory with an increased majority. Although May was quick to perform a U-turn on her more controversial social care policies this was not enough to bolster Sterling.
Further volatility is likely in response to the updated UK gross domestic product report, even though no change is expected from the first estimate. More evidence of a sharp slowdown in growth at the start of the year could soften the Pound, which remains biased to the downside thanks to Brexit uncertainty. If details of the report suggest that economic activity is likely to pick up more strongly in the second quarter, though, the GBP INR exchange rate could find a fresh rallying point.