Indian Rupee Outlook: Patel's Appointment is INR-Positive
The Indian Rupee fell following the appointment of the new governor of the Reserve Bank of India, Urjit Patel, but we see strength returning as this is an INR-positive appointment.
- Indian bond yields to rise under Patel, this is supportive of INR
- UK gilt yields to fall, suggesting UK-India divergence, which is negative for the GBP to INR exchaneg rate
- Technicals show GBP/INR in a bearish double-top pattern and exchange rate has broken below the neckline.
The new governor of the Reserve Bank of India (RBI) Urjit Patel cannot have been chuffed at the thumbs down he got from financial markets on the news of his appointment.
The new king of Indian monetary policy's appointment was greeted by red trading screens as the Sensex stock index, Indian bonds, and the Rupee all fell on the appointment.
The fall in Indian stocks is understandable given Mr Patel’s avowed hawkishness.
There will be no easy money for the stock market to gorge on under his tenure, as has been the case in Japan, for example, where the Nikkei has reached monstrous heights under the constant spoon-feeding of stimulus from the Bank of Japan (BOJ).
That bond prices fell (and yields rose) is also understandable given how Patel - the architect of the inflation-targeting policies of the Rajan administration - is not likely to cut interest rates; this should keep yields perky but lead to a fall in their prices (which are inversely related).
However, that the Rupee fell at the same time as yields rose, is illogical, and must be due to some other outside forces.
We saw the Dollar bounce, and emerging market currencies fall when over the weekend Stanley Fischer - the Federal Reserve's deputy - suggest a rate hike was more likely than the markets were factoring in.
Could this have been the real culprit behind Rupee weakness?
Much of the emerging market is hoping and praying the Fed will refrain from increasing interets rates, as such a move would increase the value of the dollar and much of their debt is dollar denominated, so will become more expensive to service.
But although this was probably only one factor in the Rupee’s fall, it was probably not the main one.
Indian Bond Yields to Rise Under Patel
Any negative impact on the Rupee stemming from the Patel appointment is unlikely to last very long as we expect the Rupee’s fluctuations to once again fall in line with interest rates.
Capital Economics expect Indian bond yields to rise under Patel, which would seem to suggest a rise in Rupee as well as foreign investors channel their money into India to take advantage of increased yields.
If true, the current bout of weakness could be providing investors with a buying opportunity, if anything.
“The appointment of Dr Urjit Patel as the new Governor of the Reserve Bank of India (RBI) strengthens our view that India’s monetary easing cycle is over and that the recent rally in its government bonds has run its course.” (Remember when bond prices rally, their yields fall, and vice versa).
Capital’s Alex Holmes comments that given Dr Patel was the architect of the inflation-targeting programme under his predecessor Rajan, he is unlikely to stray from the previous governor’s ethos, which means it is unlikely the bank will cut its base lending rates under his stewardship.
It is not just him, however, but also conditions which favour a continuation of tight policy, after recent inflation figures showed prices rising by 6.1%, which is well above the central bank’s 5.0% target.
“We think that the RBI will continue to face difficulties in meeting the target in 2017 and 2018, as commodity prices recover further and growth picks up. As such, we think that the repo rate will remain on hold for an extended period," says Holmes:
Holmes ends his note with a forecast that Indian bond yields will rise to, “about 7.5% by year end.”
Gilt yields to Remain Low for a Long-time – GBP/INR a sell?
At the same time as Capital Economics forecast a rise in Indian bond yields they also forecast a long-term continuation of record low UK bond - also known as gilt yields.
“The prospect of a further prolonged period of ultra-loose monetary policy suggests that government bond yields are set to remain markedly low for a long time yet.”
The diverging outlook for interest rates in the two countries may supply the pound to rupee exchange rate with some downside pressure, which actually chimes with the current longer-term technical outlook for the pair.
The monthly chart for the pair (see below) is showing that a bearish double-top pattern has formed and that the exchange rate has broken below the neckline.
This break signals a continuation down to the minimum downside target for the pattern at 83.195, (the current exchange rate is 88.422).
