Pound / Indian Rupee: Upside Unlikely, INR to be Robust in 2017

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There are several reasons why economists are hailing the Indian Rupee as one of the most stable currencies in world.

And the first is because of India’s unique economy.

Unlike fellow BRICS - China and Russia - which rely heavily on one or two sectors such as manufacturing and oil, India has a highly diversified economy with both strong manufacturing and services sectors – an unusual combination.

This kind of all-round strength is a rare commodity and makes the economy resilient.

The same can be said for India’s import and export markets.

“India imports and exports with the world, not just one market,” said Prateek Agarwal, CIO of Ask Investment, in an interview with the Economic Times.

Agarwal notes that the Rupee has been less volatile even than most developed country currencies amidst recent high volatility.

It has also held its ground the best out of almost all currencies versus the strengthening Dollar.

“I have been saying for a while now that the Rupee and the Renminbi are safer havens as currencies go,” said Argawal.

Indeed, it is due to another aspect of India’s economy that he even goes as far as to forecast an uptick in the Rupee index.

India’s relatively balanced Current Account is likely to be the source of Rupee strength, with the possibility that it might even produce a surplus in the next quarter.

Argawal is not the only one positive about the currency, so is Irene Cheung, FX Strategist for ANZ Bank.

Cheung sees the Indian Rupee unable to compete with the Dollar in 2017, forecasting it to end the year at 70 (up from 68 currently), however, she notes that, “Amongst all the Asian currencies, we are a little more positive about the Rupee.”

Demonetisation

The government’s decision to scrap 500 and 1000 Rupee notes recently caused a massive cash crisis in the economy, which weakened the Rupee temporarily.

Nevertheless, the currency weathered the crisis relatively well as can be seen from the exchange rate which despite falling versus the Pound at the start of the crisis on November 9, rallied and made back the losses during December.

The currency gained a boost after the Reserve Bank of India decided to keep interest rates unchanged at their December 7 meeting despite pressure to lower them due to the feared slowdown from demonetisation.

Lowering interest rates weakens a currency as it is off-putting to foreign investors seeking a place to invest their capital, since it lowers expected returns.

Outflows to the US

The Rupee has seen massive outflows to the US like all emerging market economies, since Trump took the presidency and interest rate expectations in the US catapulted higher.

However, of the emerging market currencies, the Rupee has fared better than many others – in another sign of its remarkable resilience.

Outlook for Pound to Rupee Exchange Rate

Given the Rupee’s implacability and future directional movement in the Pound to Rupee complex is likely to come from the Pound not the Rupee.

The primary driver for Sterling is likely to be Brexit expectations and in January the focus is on the decision of the UK Supreme Court as to whether Theresa

May and her government should can trigger Brexit alone or whether they need the vote of parliament.

Bearing in mind parliament is predominantly anti-Brexit if the Law Lords decide in favour of a parliamentary route, there is more chance Brexit could get watered down with increasing trade-offs between immigration and access to the common market.

If they vote to allow May prerogative powers Brexit could be ‘Harder’.

The Pound is expected to react accordingly – rising if the former and falling if the latter is the case.

The fact Theresa May has provided promises she will involve parliament as much as possible regardless of the outcome, and her comments today that she would be seeking an inclusive deal for all UK citizens not just the 52% who voted to leave, the Law Lords decision is likely to be a volatile event for sterling  in the short-term.

Overall, we think it less likely the government will gain the prerogative power to trigger Brexit since the law underpinning such a decision dates back to feudal times when monarchs ruled with no recourse to parliament.

We are therefore bullish the pound in the short-term.

Technical Forecast – More Upside an Unlikely Possibility

The chart of GBP/INR shows a slight short-term uptrend potentially developing but only if the exchange rate can break above the 50-day Moving Average which caps gains at the current 84.15 highs.

A break above the 84.30 level would probably confirm a break higher, with an initial target at 84.80.

Alternatively, there is also a chance December’s little downtrend may extend lower.

A break below 82.88 would confirm more downside, to a target at 82.000.

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Longer-term the pair is looking slightly bullish as it has now reached the target generated by a double top reversal pattern, clearly visible on the monthly chart, and may be set for a recovery.

This supports more upside in-line with our fundamental bias towards expecting upside in January for Sterling when the Judges decide on Brexit.

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