Pound-Rupee Rate at Risk of Return to the 90s after Reserve Bank Meeting Tomorrow

- GBP/INR looking toppy before Indian central bank meeting

- Reserve Bank not expected to cut interst rates = good for Rupee

- Possibility exchange rate may slide back down as Rupee strengthens

© Kasto, Adobe Images

THe Indian Rupee may be supported by fundamental factors over coming days despite a jittery market outlook.

Tomorrow (Thursday, April 5), the Reserve Bank of India (RBI), the organisation tasked with setting interest rates, meets for its April meeting and expectations that it will keep rates at current levels are supportive.

Interest rates in India are currently 6.0%, and although inflation has been falling recently – in February it slumped to 4.4% from 5.05% previously – the RBI is not expected lower interest rates in response, as some might expect, at least not according to analysts at investment bank TD Securities.

“We expect the RBI to leave policy rates unchanged and maintain a neutral stance at its first meeting of the new fiscal year on 5 April in line with consensus expectations,” says Richard Kelly, head of global strategy at TD Securities.

A decision to leave rates unchanged is unlikely to impact the Rupee. At most, it might marginally strengthen it by proving a segment of the market wrong. Lower interest rates disincentivise foreign investors from parking their cash in India so keeping rates high will continue to encourage inflows.

“An unchanged outcome is likely to have little impact on INR,” says Kelly, adding, “RBI will likely be cognizant of the rupee's recent volatility, a factor that could support an on-hold decision.”

Inflation is expected to recover strongly over the next 6-months providing another reason for not being too hasty in cutting rates as the decision might soon need to be reversed.

There are other reasons for not expecting the RBI to cut rates.

If anything, the RBI is more likely to be disposed to defending the Rupee than seeing it weaken, because of outside risks.

The RBI will be cognizant of how US interest rates are on a strong upwards trajectory and to place India at odds with that trend would create unnecessary volatility in foreign exchange markets.

Increasing US Trade protectionism and rising oil prices are a further disincentive. India has to import all of its oil from abroad and so a weaker currency especially versus the Dollar would make that more expensive.

Kelly is short-term ‘cautious’ on the INR “due to higher external market volatility,” but longer-term bullish.

The longer-term outlook for growth in the economy is positive as India gets over its recent growing pains from the implementation of the Goods Services Tax (GST) and demonetization.

“We expect credit growth to show further signs of improvement, helped by the recapitalization process for public sector banks (totaling INR 2.11 trillion). Additionally, the support to rural activity as detailed in the Union Budget will help to shore up demand,” says Kelly.

From a technical perspective too, the forecast supports the RBI staying pat.

A rising Rupee makes more sense than a falling one from the perspective of a technical analysis of price charts.

The monthly chart shows the GBP/INR exchange rate bashing up against a tough bough of overhead chart resistance in the form of the 2015 lows – which it has arguably broken above - but also the 50-month moving average which it has not yet broken above.

Both major historic lows and major moving averages can be obstacles to further price growth.

There is a strong chance, therefore, of the pair correcting substantially lower which would mean the Rupee appreciating versus a falling Pound.

The weekly chart tells a similar story and is showing how the exchange rate is currently backing into the 200-week moving average - another significant level for the pair.

Again, this will be a tough obstacle for the exchange rate to overcome and a pull-back or reversal is quite possible instead.

The daily chart below shows further evidence of weakness for GBP/INR on the horizon. The pair has just broken out of a triangle pattern and shot up. It has reached its upside target and has pulled back. Triangles are often the penultimate pattern in a trend, suggesting the short-term uptrend may have finished.

We see a heightened chance of the current pull-back from the 92.41 highs extending lower.

The chart has consolidated sideways for the last 3 days but eventually, we expect it to break lower again and probably stretch down to retouch the 2015 lows at 90.90.

A break below 91.23 would provide confirmation of such a move.

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