Worries over the prospect of a hard Brexit weighed heavily on the GBP INR exchange rate in the early week, particularly as risk appetite was also generally elevated. Feathers were ruffled by Theresa May’s comment that the government was not interesting in holding onto ‘bits’ of its EU membership. This was seen to raise the risk of the UK facing greater barriers in its trade with the bloc, disquieting investors and prompting Sterling to slide across the board.
Confidence in the Pound recovered somewhat in response to the NIESR gross domestic product estimate, which indicated that growth had remained solid at 0.5% in the three months to December. This positive showing encouraged investors to buy back into the weakened Sterling, particularly as worries over Brexit were eclipsed by political developments across the Atlantic.
Strong Indian Production Failed to Shore up Rupee
A further boost for Sterling came on the back of ‘Retail Super Thursday’ as a number of major UK retailers reported their Christmas financial results. Strong sales figures from Tesco and Marks & Spencer pointed towards continued optimism amongst consumers, with high spending boding well for the economy. While this momentum is unlikely to last for long, thanks to the feed-through of higher inflationary pressure into shop prices and wages, this was still enough to boost the Pound in the short term.
Indian production rebounded sharply in November, with industrial output surging 5.7% and manufacturing rising 5.5% on the year. Altogether this offered a more encouraging picture of the domestic economy, boosting the appeal of the Rupee further. However, even with positive domestic data and heightened market risk appetite the GBP INR exchange rate continued to recover ground on Thursday.
May Speech on Brexit Could Push GBP INR to Fresh Lows
Pressure on the Rupee could increase on Monday with the release of December’s trade balance, given that a deficit of -13 billion was posted in November. Any widening of the deficit could damage the outlook of the Indian economy, which remains fragile in the wake of the demonetisation of the 500 and 1000 Rupee notes. However, if wholesale price index inflation is found to have dipped this could offer some fresh support to the emerging-market currency.
Volatility is likely next week as Theresa May will be delivering her much-anticipated speech on Brexit, which could see the GBP INR exchange rate slump dramatically once again. Markets will be keen to gain some clarity over the government’s aims for negotiation, in particular the stance with regards to single market access. If May takes a harder line of rhetoric then the Pound could fall to a fresh multi-month low against the Rupee.
Also in focus will be December’s UK Consumer Price Index report, which could show that inflation continued to pick up at the end of 2016. Any increase in inflationary pressure may encourage the Pound to trend higher, in spite of the negative implications for wages and consumer spending. While the Bank of England (BoE) does not appear to be in any hurry to return to a monetary tightening bias rising inflation could be seen as a deterrent against any further policy easing in the near term.