Pound to Rupee Outlook: Despite Technical Recovery, INR Favoured on Basis of Solid Fundamentals

The Indian rupee (INR) is supported by rising growth and inflation which contrasts with the pound which remains floundering after its self-inflicted referendum wound.

Starting with the charts, GBP/INR, closely resembles GBP/USD, as both the dollar and rupee are are currently at the top-table of the currency multiverse.

The chart of GBP/INR is below and on the left hand side we see the strong Brexit down-trend in late June.

After this bottomed the pair has corrected, and is currently consolidating in a tight range since mid-July.

The correction looks unfinished as it would normally be expected to be composed of at least three waves (see red line on chart below) and the current correction is so far only made of two – therefore a final leg higher would seem to be highly likely.

Such a move would probably be confirmed by a break above 89.40 would probably confirm the onset of the ‘c’ leg up to a probable target at 90.24.

Whether or not the recovery goes higher and is part of an inverse head and shoulders reversal remains uncertain, however, as the pattern is less clear on GBP/INR the other GBP pairs.

These bullish moves in the pair go against the general fundamental themes of GBP weakness due to Brexit shock uncertainty, and would require an expectations-changing piece of data.

There is a possibility the final estimate for July PMI’s could supply that next week, if they show a radical upwards revision.

Otherwise there is a very low chance -  but chance nevertheless that the BOE will delay implementing stimulus yet longer.

Rupee Benefits from Strong Fundamentals

The short-to-medium term outlook for the rupee is otherwise broadly positive as data continues to show the country enjoying a high level of growth, with Q1 GDP topping expectations at 7.9%.

Inflation too continues to rise with Consumer Inflation reaching a 22-month high in June.

Analysts also say the government’s new Goods and Services Tax (GST) has improved the outlook for the currency as it seen as an important reform which will attract more investment.

The GST is working its ‘magic’ with the Indian Currency according to a report in the Financial Express Online:

“Currency experts and analysts are of the view that current strength in the rupee is due to hopes of the Modi government finally scoring a win on the GST Bill. Television reports suggest that the Bill will come up in Rajya Sabha next week and the Goods and Services Tax (GST) may well clear the final hurdle of theUpper house in this session of the Parliament.”

One downside factor for the currency, however, are the high amount of expected outflows of rupees from a swap agreement, known as the FCNRB, made by the Bank of India to increase its reserves:

Yes Bank’s Chief Economist Shubhada Rao said the FCNRB would be a factor capping gains in rupee pairs:

“GST and other reforms are adding to the positive sentiment, but I don’t think the RBI will let rupee appreciate much. The Real Effective Exchange Rate does not support that. Additionally, with the FCNRB outflows playing out from September to November, there will be pressure on the rupee.” She said, also in the report by Financial Express Online.