Pound vs Indian Rupee Rate Forecast to Commence Major Long-Term Bear Trend

Now this 20-year trend may be coming to an end after the formation of a 3-year long double top completes

Charts are hinting towards the potential for the pound to rupee exchange rate (GBP/INR) to commence a major long-term downward trajectory.

Pound Sterling remains under notable pressure on global foreign exchange markets with the post-Brexit selloff continuing unchecked.

For the GBP/INR it therefore comes as no surprise that Sterling is the key driver in the relationship.

The monthly historical chart for the GBP into INR conversion could not look more bearish.

A large three-year long topping pattern has now completed and at any moment is ready to trigger a drive lower starting a major bear trend.

It tops off an extended secular (very long term) bull trend which has seen the pound appreciate from 50 rupees to one pound in 1996, to 106 rupees in 2013.

Now this 20-year trend may be coming to an end after the formation of a 3-year long double top completes, and the exchange rate pushes below the all-important 90.85 neck-line.

From here it is likely the pair will move down to an initial target at the 200-month moving average situated at just below 81.50.

Double tops form after the market has been in an extended up-trend. They are made up of two peaks of similar heights occurring at the same level.

After the formation of the second peak the market moves lower to the level of the intervening trough low, known as the neckline.

A break below that provides the confirmation the pattern has triggered and the market is moving dramatically lower.

The target from a double top is generated by extrapolating the height of the pattern lower, from the neckline.

They are normally reliable, and the double top on GBP/INR provides a strong suggestion the pair will embark on at least a medium term bearish trend.

New BoI Governor Could Boost Rupee in the Short Term

On June 18th RBI Governor Raghuram Rajan surprised markets by announcing that "on due reflection and after consultation with the Indian government," he will not extend his three-year term.

Many believe Rajan had done a good job at the central bank and the departure will understandably prompt nerves amongst international investors.

ABN Amro's Senior FX Strategist Roy Teo thinks his replacement will almost certainty be a hawk willing to put inflation control above growth, keeping interest rates high, and whoever the person appointed, when they take over the rupee could gain simply on relief that higher interest rates are likely to persist.

“While it is still an early call, we view that this may imply that the new governor is unlikely to materially change the current monetary policy bias of taming inflation. However, in that respect the composition of the newly established Monetary Policy Committee will also play an important role. A relief recovery in the INR may materialise as a result.”

India’s Banking Crisis Easing Say Nomura

While the INR may be turning more bullish against the Pound, against the US Dollar analysts are more cautious on the outlook. 

One potential cap on Rupee strength is likely to be the Indian state bank crisis argues Senior FX Strategist  at Abn Amro, Roy Teo.

“Firmer oil prices (upside risk to inflation in India) and continued concerns on state banks’ bad loans will continue to weigh on the INR. All in all, we expect a somewhat weaker INR by end-2016 and in early-2017.  We have raised our 2016 year end USD/INR forecast from 67 to 69,” says Teo in a foreign exchange briefing to clients

The banking crisis was caused by 192bn dollars in delinquent loans, mainly held by state banks, which have three quarters of the country’s banking market share.

A report from Nomura bank cited in an article on the crisis on website Quartz India, on June 24, appeared to play down concerns about the crisis after recent

Bank of India stress tests had led to the industry taking proactive steps to combat the problem and stem contagion:

“Some six months after Reserve Bank of India (RBI) governor Raghuram Rajan began a massive clean-up, a review by Nomura shows that Indian banks have already recognised most of their stressed loans as non-performing assets (NPAs) or have put them on a watch-list.” Says the article by reporter Madhura Karnik.

The article goes on to quote from the Nomura report:

“Our detailed analysis of a breakdown of the stressed assets of banks gives us a conviction that we are nearing the peak in NPAs, especially for public sector units, as (nearly) 30-50% of their exposure in stressed sectors have been either marked as NPAs or restructured,” the Nomura report on June 23, authored by analysts Adarsh Parasrampuria and Amit Nanavati, said.

However, a report by the head of one of India’s largest purchasers of the distressed assets, Kotak Mahindra, in the Financial Times on June 27, suggests the crisis may still have further to run.

Mahindra said that Indian Banks were not marking down their distressed assets sufficiently for his bank to be interested in buying them:

“Kotak Mahindra, which claims to be the country’s biggest buyer of stressed loans over the past decade, is struggling to find deals in this space because banks are in denial over the true value of their troubled assets,” reported the FT.

“We love buying bad loans at a fair price . . . but right now banks are not willing to sell loans for cash at a clearing price,” Mr Kotak was quoted as saying, adding that he expected it would take “12 to 18 months” for the troubled banks to accept accurate valuations of their stressed assets.”