Although Chinese exports were found to have sunk further-than-forecast in July the resultant increase in market risk aversion failed to particularly weigh on the Indian Rupee. Despite its close proximity to the Chinese economy investors remained confident in India’s outlook, with the emerging-market currency also benefitting from US Dollar weakness. As markets are increasingly dismissive of the chances of the Federal Reserve opting to raise interest rates before the end of the year the higher-yielding Rupee remained in favour.
Dovish commentary from Bank of England (BoE) policymaker Ian McCafferty added downside pressure to the GBP INR exchange rate, meanwhile, with the suggestion that rates could be cut further in the near future. This was particularly notable considering that McCafferty is considered to be the most prominent hawk on the Monetary Policy Committee (MPC) and was viewed as increasing the likelihood of more loosening being introduced in the coming months. The bearish outlook of the Pound was deepened by the news that the BoE had failed to find enough sellers at its first post-Brexit reverse gilt auction, prompting speculation that its QE program could already be in trouble.
Rupee Weakened by Imminent Departure of RBI Governor
The Rupee strengthened in the wake of the Reserve Bank of India’s (RBI) decision to leave interest rates on hold for another month. While there had been no real expectation for a change this nevertheless reassured markets, despite the imminent departure of Governor Raghuram Rajan. However, some of the bullishness of the Rupee soon began to fade as market worries over his replacement began to intensify. Investors are concerned that Rajan’s progressive reforms and focus on lowering inflation may not be carried forward, something that would diminish the appeal of the Indian economy.
Unsurprisingly, the NIESR Gross Domestic Product estimate for July pointed towards a loss of momentum within the UK economy. Analysts predicted that the three months to July saw growth slow from 0.6% to 0.3%, suggesting that the Brexit vote had a significant immediate impact on the economy. While this appeared to match the Bank of England’s (BoE) forecasts and vindicate its decision to cut interest rates, the figure also appeared to pave the way for further monetary loosening. As a result the GBP INR exchange rate slumped sharply to hit a low of 86.6048.
However, confidence in the Indian economy continued to falter on Friday, despite the continued weakness of the US Dollar. It was a disappointment across the board, with Industrial and Manufacturing Production figures failing to strengthen as far as forecast and inflation being found to have risen further than expected. This was not great news for the RBI, reigniting concerns over the difficulties that could face Governor Rajan’s successor and allowing the GBP INR currency pair to recover some ground and trend in the region of 86.9716.
Higher UK Inflation Likely to Increase Odds of Further BoE Easing
Inflation data looks set to be the primary mover of the Pound in the coming week, with the UK releasing its first post-Brexit CPI report on Tuesday. As a result the GBP INR exchange rate should be expected to see some pronounced volatility. Higher levels of inflation would seem to point towards further monetary stimulus, which could see the Pound slumping further.
Should the latest Indian manufacturing figures indicate strength, meanwhile, the Rupee could extend its recent gains further. Signs of robustness within the domestic economy would increase the appeal of the Rupee, particularly if markets do not experience a particular decline in risk sentiment. If the odds of the Fed hiking rates in the near future diminish further than the GBP INR exchange rate is expected to trend lower.