Macro tailwinds favor the Indian rupee to pound

The British pound pulled back against key developed and emerging market currencies after the relatively encouraging UK inflation data. The GBP/INR price retreated to the psychological level of 100, which was a few pips below this week’s high of 101.24. 

Encouraging UK inflation data

The GBP to INR price declined sharply on Wednesday as traders reflected on the latest UK inflation numbers that I wrote about here. The numbers revealed that the country’s consumer inflation was heading in the right direction. 

Are you looking for fast-news, hot-tips and market analysis?

Sign-up for the Invezz newsletter, today.

According to the ONS, the headline consumer inflation dropped to 0.6% on a month-on-month basis. Core inflation also declined to -0.9%. On an annual basis, the country’s headline and core inflation dropped to 10.1% and 5.8%, respectively. 

These numbers mean that the country’s inflation has peaked and that it is falling. Most importantly, services inflation, which has remained stubbornly high for months, has started falling. As such, these numbers reinforce the case that the Bank of England (BoE) will start pivoting soon. In a note, analysts at ING wrote:

“We are therefore still penciling in a 25bp hike next month for the time being – and the Bank’s own Decision Maker Survey in early March is the next big data point to watch. But if this trend in services inflation persists, then it would be a strong argument in favour of pausing in May.”

GBP/INR outlook

Therefore, the GBP/INR forex price dropped as investors wait for a more dovish tone by the Bank of England (BoE) in the near term. Unlike the Reserve Bank of India (RBI), the BoE is between a rock and a hard place since the economy is staring at a recession. India, on the other hand, is doing well and is set to be the fastest-recovering economy in the world.

India is benefiting from numerous tailwinds. Unlike the UK, the country is importing vast amounts of natural gas and oil from India at a bargain. At the same time, many companies, including Apple, are moving to the country as tensions between the UK and China escalate. 

Therefore, most analysts believe that the economy will continue expanding in the next few years. The UK, on the other hand, is going through headwinds as energy costs soar and as investments drop after Brexit. For example, auto manufacturing in the country has plunged to its lowest point since the 1950s.

Therefore, there is a likelihood that demand for the Indian rupee will be higher than the British pound in the coming months.