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GBP to INR Exchange Rate Tumbles on UK Growth Concerns

July 4, 2017 - Written by Ben Hughes

This week has seen India roll out its new Goods and Services Tax (GST), which has led to cautious but optimistic Indian Rupee trade. The Pound to Indian Rupee exchange rate has slipped as this week’s UK PMIs have so far disappointed.

After making big gains last week on surprising Bank of England (BoE) news, GBP/INR ended the week trading at around 84.19 – near its best levels since February. This week has seen the pair shed some ground and drop below 84.00.

GBP Weakens on PMI Concerns

Sterling investors have been a little less optimistic about Britain’s economic outlook so far this week, as Markit’s manufacturing and construction PMIs from June have come in short of expectations.

Last week saw Bank of England (BoE) Governor Mark Carney surprise investors by indicating it may be necessary to withdraw some of the bank’s aggressive stimulus policies sooner than previously expected.

However, Carney was careful to note that this relied on the resilience of Britain’s economy. He pointed out the uncertainties of Brexit negotiations and Britain’s slowing wage growth as potential downside risks.

This week’s PMIs have so far suggested that economic activity in Britain had been slower than expected in June, raising questions about whether Britain’s economy will be resilient enough to support tighter monetary policy.

Markit’s manufacturing PMI, published on Monday, was forecast to come in at 56.5 but instead dropped from 56.3 to 54.3. The construction PMI dropped from 56 to 54.8, missing the projected 55.

According to Duncan Brock, the director of customer relationships at the Chartered Institute of Procurement & Supply;

‘The construction sector’s confidence took a knock this month as optimism fell to its lowest reading in 2017 and clients became more restrained in placing new orders. Respondents cited continuing uncertainty in the run up to the election and Brexit negotiations for the hesitancy.’

Sterling remained largely flat overall however, as investors have opted to wait for Wednesday’s key services stats before moving on the Pound.

INR Edges Higher on Market Confidence for GST

India’s new Goods and Services Tax (GST) is being rolled out this week.

Touted as India’s biggest tax reform in over half a century, the indirect tax system looked to replace the previous tax system, which saw multiple taxes handled by different central and state governments.

Economists and analysts have been generally optimistic about the long-term potential for GST, but have warned that India and its citizens may struggle during a turbulent transitional period over the next few months.

A new report from Fitch Ratings has suggested that GST is also unlikely to substantially improve India’s revenue in the short-term. According to the report;

‘GST will unify the indirect tax system and remove domestic barriers to trade, which should support productivity gains and GDP growth over the long term.

… The GST is unlikely to increase revenue in the short term.’

As a result of the short-term uncertainty during the GST transitionary period, the Indian Rupee’s gains have been minimal.

The Rupee has also not seen any notable support from this week’s Indian data. Monday saw the publication of Nikkei’s June manufacturing PMI, which slowed from 51.6 to 50.9.

GBP/INR Forecast: UK Services Results Due Wednesday

Tomorrow will see the publication of Markit’s UK services PMI for June. As services make up a notable chunk of Britain’s Gross Domestic Product (GDP) growth, this report will give investors a better idea of how resilient the economy has been.

If services fall short of expectations, investors will become even more concerned that rising inflation and slowing wage growth are hurting UK consumer activity, which could dampen growth later in the year.

This would cause many investors to doubt the potential for tighter Bank of England (BoE) monetary policy any time soon, and the Pound would drop.

The opposite is also true however. If services beat expectations, confidence in the UK economy’s resilience will improve and BoE tightening bets will rise, leading to stronger Pound demand.

India’s services PMI for June will be published by Nikkei, but this typically low-influence report is unlikely to have an impact on Indian Rupee trade.

As India’s GST rules continue to take effect, more analysts are likely to offer their thoughts on the system. Investors are likely to be generally hawkish on the Indian Rupee so long as the long-term GST outlook is optimistic.
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