GBP/INR Exchange Rate Weakens on Heightened Risk Appetite

• Pound strength faltered after downward revision of UK GDP – Weaker growth weighed on market optimism
• Emerging-market currencies shored up by oil price rally – Indian Rupee strengthened
• Stronger UK consumer confidence bettered forecast – GBP/INR exchange rate unable to capitalise on improved figure
• Rupee volatility forecast with Indian GDP report – Expectations point towards slowed growth

An increased atmosphere of market optimism helped to put Pound Sterling (GBP) on a bullish run across the board this week, as investors were inclined to reduce the odds of the UK voting to leave the EU. Warnings from Bank of England (BoE) Governor Mark Carney and the Institute for Fiscal Studies (IFS) over the potential negative impact that a ‘Brexit’ could have on the domestic economy were seen to encourage support for the ‘Remain’ camp. Even though the polls remained generally mixed this was not enough to discourage support for the surging Pound.

However, Pound Sterling to Indian Rupee (GBP/INR) exchange rate gains were brought to a halt on Thursday. Demand for the Pound saw a sharp decline after the publication of the second estimate of UK GDP for the first quarter. On the year growth was revised down from 2.1% to 2.0%, indicating that slowdown pressures had been more pronounced than initially estimated. The service sector was shown to still be the primary driver of domestic growth, with weakness on display throughout the rest of the economy. Even assuming that GDP will bounce back in the third quarter, once referendum uncertainty has eased, this provided little reason to have confidence in the Pound.

Risk appetite was generally shored up, meanwhile, due to a particularly strong rally in oil prices. Brent crude climbed back above $50 per barrel for the first time since November 2015 on the back of a larger-than-expected fall in US stockpiles. As a result the Indian Rupee (INR) strengthened against rivals, benefitting from increased demand for higher-yielding assets. Rising scepticism over the likelihood of an imminent Fed rate hike equally offered support to the Rupee, rising in opposition to the weakening US Dollar (USD).

Higher UK Consumer Confidence Failed to Prompt GBP/INR Exchange Rate Rally

Some optimism returned to the outlook of the Pound on Friday following an unexpectedly improved GfK Consumer Confidence Index. While forecasts had suggested a further dip in sentiment, the index was instead found to have edged higher from -3 to -1 in May. This implied that uncertainty relating to the EU referendum was not weighing as heavily on consumers’ minds at this juncture, raising hopes for a wider rebound in domestic activity and sentiment. Nevertheless, this was not enough to outweigh the impact of the disappointing GDP data, leaving the GBP/INR exchange rate on a downtrend.

Demand for the Rupee remained strong ahead of the weekend in spite of stronger-than-expected US Durable Goods Orders and Pending Home Sales figures. While positive data would seem to raise the odds of the Fed choosing to raise interest rates imminently, markets remain largely unconvinced that policymakers will follow through on their recent dovish rhetoric. The latest rally in emerging-market assets has offered particularly strong support to the Rupee, although analysts at Brown Brothers Harriman suggest that this is unlikely to last, noting that:

‘The Dollar’s appreciation trend resumed as Fed tightening expectations have picked up.  Our base case is a June or July hike.  As such, we will retain a defensive posture with regards to EM as the June 15 meeting approaches. Furthermore, the Brexit vote on June 23 also has potential to boost market turbulence as we get closer.’

GBP/INR Exchange Rate Forecast: Weaker Indian GDP Could Soften Rupee Demand

Next week will see the Rupee more driven by domestic data, with a raft of higher-impact ecostats scheduled for release. The Manufacturing and Services PMIs for May are expected to offer some reassurance in the continued strength of the Indian economy, albeit with only a modest uptick in expansion forecast for the measures. Of greater concern to investors, however, will be Tuesday’s GDP report, which is expected to show a slight slowing in growth for the first quarter.

With little in the way of UK ecostats at the start of the week ‘Brexit’-based sentiment is likely to continue dominating the outlook of the Pound. Market optimism may struggle to reignite, with analysts at TD Securities noting:

‘Using the most recent six surveys as a “poll of polls”, or sentiment measure, the perceived surge in support last week was due to an increase in the frequency of telephone poll results, rather than an outright shift in sentiment towards a Remain win.’

As Pound volatility is expected to worsen ahead of the June referendum the GBP/INR exchange rate could consequently cede more ground, particularly if risk appetite continues to shore up the Rupee.

Current GBP, INR Exchange Rates

At the time of writing, the Pound Sterling to Indian Rupee (GBP/INR) exchange rate was trending lower at 98.2180, while the Indian Rupee to Pound Sterling (INR/GBP) pairing was making gains in the region of 0.0101.