GBP INR Exchange Rate on Bullish Form as Brexit Nerves Ease

There was little reason for investors to favour the Pound at the start of the week, in spite of the political turmoil stemming from Brexit beginning to ease. Both the UK Construction and Services PMIs for

June fell short of forecast, with sector growth weakening sharply even before the outcome of the referendum was known. While the Construction PMI showed the fall into contraction territory markets were more concerned by the slowdown in the service sector, given that this accounts for the vast majority of GDP.

Investors were not impressed to find that the Indian Services PMI had disappointed expectations, meanwhile, with the measure weakening rather than strengthening as forecast. The PMI dipped from 51 to 50.3, edging perilously close to the neutral baseline that separates sector growth from contraction. This undermined confidence in the outlook of the domestic economy somewhat, prompting the Rupee to weaken against rivals. Nevertheless, the softness of the Pound prevented the GBP INR exchange rate making any gains as a result.

The jittery mood of markets was not improved by the fact that a succession of UK property funds were prompted to freeze withdrawals throughout the week. This was in response to a wave of redemption requests that the funds could not satisfy without the sale of assets, which naturally triggered further unrest. It had earlier been noted by the Bank of England (BoE) in its latest Financial Stability Report that the domestic property market is particularly vulnerable in the wake of Brexit. As a result the GBP INR exchange rate extended its downtrend, slumping to a fresh thirty-five month low of 86.6750.

Pound Recovered Ground on Market Optimism

Confidence in the Pound rallied strongly on Thursday, however, with a round of consolidation trading helping to boost the currency away from its recent lows. Investors reacted positively to the latest Industrial and Manufacturing Production figures, despite the fact that these are somewhat outdated thanks to the referendum outcome. UK output proved decidedly stronger than anticipated in May, suggesting that the economy had been in robust form earlier in the second quarter.

This bullishness ultimately struggled to sustain itself, however, after the NIESR Gross Domestic Product estimate for June warned of a contraction in activity. As a one-off post-referendum GFK Consumer Confidence Index also showed a sharp decline in sentiment from -1 to -9 as a result of the Brexit vote the GBP INR exchange rate soon returned to more muted form.

Demand for the Rupee was encouraged ahead of the weekend by the news that foreign direct investment into India had outpaced both China and the US for the first time. This seemed to affirm that the Indian economy has overtaken China as the fastest growing in the world, an optimistic signal for investors. Nevertheless, this new-found status may prove short-lived thanks to the imminent departure of Reserve Bank of India (RBI) Governor Raghuram Rajan, which could jeopardise the attractiveness of the Indian economy.

Rising Indian Inflation to Boost GBP INR Exchange Rate

Sentiment towards the Rupee is expected to weaken further in response to Tuesday’s domestic data, with forecasts pointing towards disappointment. Industrial and Manufacturing Production are predicted to have contracted on the year in May, suggesting mounting slowdown pressures within the economy. Also of concern is likely to be the June Inflation Rate measure, which is expected to edge higher once again from 5.76% to 5.94%. As the RBI’s target for the current financial year is just 4.00% this could prompt greater Rupee volatility.

Brexit concerns are likely to hamper the appeal of the Pound for some time to come, meanwhile, as uncertainty undoubtedly remains over the future of the UK economy and its relationship with the EU. With markets expecting the Bank of England (BoE) to slash interest rates on Thursday the GBP INR exchange rate will remain exposed to downside bias in the coming week.