Pound / Indian Rupee Rate Likely to Rise Further
Analysts say India's Rupee remains vulnerable to central bank action, which chimes with the bullish outlook we have observed on the GBP/INR chart.
Market commentators are generally bearish on the Rupee as a result of expectations of central bank policy easing or direct intervention in foreign exchange markets with the express purpose of devaluing the currency.
The USD/INR rose over 20 paise in early trading on Monday after rumours circulated that the Indian Trade and Finance ministries were getting together to discuss direct intervention to devalue the rupee.
The reports have since been denied, but the damage may have been done.
A devaluation would presumably involve the Reserve Bank of India in market operations.
However this seems unlikely given the RBI administration – both under Rajan and now Patel have pursued an inflation targeting strategy – ie keeping inflation low – which would be at odds with a devaluation of the rupee.
This is because a currency devaluation could potentially increase inflation.
Lloyds Commercial Banking say they see an interest rate cut by the RBI in October as a possibility.
However, we believe this does not seem likely given inflation is not below the 4% target set by the RBI.
Recent data shows inflation stands at 5.05%, and although that represented a substantial drop from the 5.50 forecast, it is still above the 4.0%.
India enjoys the highest growth rate in the world, despite disappointing Q2 GDP data, and this will continue to attract overseas investment, helping to bolster the Rupee.
Portfolio inflows from investors seeking to buy shares in India’s strong stock market is also likely to support the Rupee strength going forward.
India's trade deficit is narrowing due to the low price of oil one of India’s major imports, further providing a supportive trade balance backdrop for the currency.
As research shows from the Bank of International settlements (BIS) (see graphic below) the rupee appears to be more sensitive to Foreign direct investment and portfolio inflows than the trade balance in goods.
The positive outlook for domestic growth and the stock market, is therefore likely to keep the Rupee well supported in the long-term, and although cognisant of what the big bank analysts are saying about the possibility of RBI action, would be surprised to see such a move from them, and therefore see it as highly unlikely at the current juncture.
Pound to Rupee Outlook
From a technical perspective there is potentially marginally more potential for the pound to strengthen versus the rupee, although that very much depends on whether the outline of a possible inverse head and shoulders reversal pattern at the lows blossoms and breaks higher.
If it does, and the exchange rate rises above the neckline and the 89.55 August highs, the pair will probably continue higher to an initial target at 90.19 where the R1 monthly pivot is situated - a support and resistance area where traders often cluster additional supply.
Alternatively it is also quite possible the pair could continue selling off, especially after Fridays large down-day, and a break below the current trough lows at 87.13 would probably lead to a sell-off down to the S1 monthly pivot at 86.19 instead.
