Sharp INR Depreciation and After :: JPMorgan

 A widening CAD and fears over QE tapering have resulted in a sharp
sell-off in the INR (depreciating a significant 11% vs. US$ over the last
two months).
 Over the last 15 years, there have been 10 phases of meaningful INR
depreciation. In this report, we examine market performance over these
phases of depreciation and in the quarter after.
 The extent of under performance of Indian equities vs. peer group,
during phases of sharp INR depreciation has increased over the
recent past.
 Sectoral performance. Expectedly, defensives and export-oriented
sectors have outperformed during phases of INR depreciation. Utilities,
Financials, Industrials and Materials have tended to underperform. As
the INR bottoms out, sectoral performance has been more mixed.
Staples and Energy continued to outperform. But, Materials and
Industrials bounceed back from beaten down levels.
 Our portfolio stance has been biased for a while in favour of IT
services, Healthcare, Energy, state-owned Utilities and ‘sin’ stocks
within the consumption basket.
 At the macro level, the inverse relationship between the INR and WPI is
increasing due to better fiscal resolve on the part of the Government. The
relationship between GDP growth and the INR has strengthened too over
the last few years, suggesting that any sustained reversal in the INR
would be contingent on a durable economic recovery

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