Eye on India:: $ Rs ₤ € - Rupee not so equal ::Macquarie Research,

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Eye on India
$ Rs ₤ € - Rupee not so equal
Event
 The Indian Rupee has been the worst performing currency in AEJ losing
nearly 8% in the last one month. Henry Ross Perot said “A weak currency is
the sign of a weak economy, and a weak economy leads to a weak
nation”. While the cause-effect relationship between currency and the equity
market can keep changing in the short term, what is of significance is that the
two have a strong positive correlation over the long term. This is true for most
economies except the US, China and Japan which seem to be negatively
correlated.
 Since 2001, a weak rupee has coincided with two global recessions and two
periods of growth. Recent equity performance trends are akin to those
observed during recessions. However our base case assumption is that of
slow growth globally rather than a recession. Our economist, Tanvee Gupta
Jain, expects the USD-INR rate to hover in the 47-47.5 range till Mar-12
before reverting to the 45-46 range post Jun-12.
 Based on our ten-year analysis, Energy, IT and Healthcare turn out to be
consistent performers during rupee weakness in a non-recession
environment. Stocks that may benefit in this environment are Infosys,
Reliance, Cairn and Dr. Reddy’s. One sector which underperforms during
rupee weakness, recession or no recession, is Financials.
Impact
 The see-saw continues: The market gave up last week’s gains but has
rebounded in the past two days. IT bounced back (+1.6%) on the back of a
weakening rupee, while capital goods (-4.5%) was the worst performer. Since
August, FIIs have net sold US$2bn and MFs have bought US$320m worth of
equities. Amongst our top-10 stocks, Infosys (+3.1%) was the best performer
while L&T was the worst (-7%).
 Rate hike and weakening macro – where will it end? The RBI raised the
repo rate by 25bps. Our economist, Tanvee Gupta Jain, believes this marks a
pause in the rate hike cycle, at least for now, which we perceive as a positive
sign for equity markets. However, with WPI at 9.8% and IIP growth slowing to
3.3% yoy, the bigger worry now is the trajectory of growth and inflation.
 Populist bills find favour this week: This week the government released the
draft of the National Food Security Bill (Link) and also referred the Land
Acquisition Bill to the Parliamentary Standing Committee (Link). We will likely
see more such populist policies in the run up to the UP elections as the
government scampers to rebuild its tainted image after recent events.
Outlook
 Stuck in a range: Markets have been volatile but stuck in a range. We see
little which can help it break out of it. Government has been galvanised into
some activity but hard decisions are missing. RBI might be politically forced to
stop rate hikes but growth may not return unless government takes some
bitter pills. The first meeting Sonia Gandhi does on her return from illness is
UP elections, which shows you the focus is already shifting. Brace for weak
results in Oct and sell on rallies.