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Weakening Rupee? How To Neutralise Impact

Having exposure to international funds and gold is a must for those who have foreign currency-denominated goals, suggests Sanjay Kumar Singh.

If your child is headed to a university in the United States soon and you have to pay her fees in the coming days, then the recent depreciation of the rupee from the 72-plus level in March to 75-plus in April to Rs 77.69 in the opening trade on Tuesday, May 17, 2022, would have left you worried.

The bigger cause for worry, however, is the tendency of the rupee to depreciate against the US dollar over the long term.

Over the past 10 financial years, on average, the rupee has depreciated at a compounded annual rate of 4.7 per cent against the dollar (between 2011-2011 and 2020-2021).

Today people have multiple goals that will require them to spend in foreign currencies –children’s higher education, foreign travel, purchase of house abroad, and so on.

Clearly, they need to build a portfolio that can safeguard them against the trend of currency depreciation.

High inflation differential

Why does the rupee keep depreciating against the dollar over the long term? Says Abheek Barua, chief economist, HDFC Bank: “India keeps losing trade competitiveness due to the higher inflation rate in our economy vis-a-vis that of our trading partners.”

While the US usually runs a low inflation rate (two per cent or less), in India it is much higher.

The Consumer Price Index (Industrial Workers)-based inflation has averaged 6.7 per cent over the past 10 financial years.

The rupee depreciates due to this erosion in competitiveness.

Barua explains that the depreciation would have been higher, but for the fact that the Indian markets receive robust capital inflows.

Invest in international funds

The best way to deal with this issue is to have a geographically diversified portfolio, that is, hold dollar assets.

“Build a simple portfolio comprised 50:50 of a Nifty index fund and an S&P 500 index fund,” says Avinash Luthria, a Sebi-registered investment advisor and founder, Fiduciaries.

Not only will investing abroad give you the benefit of geographical diversification, holding dollar-based assets will also make your portfolio less susceptible to currency risk.

The US market has been in a continuous bull run since 2009, making many investors wonder if it is prudent to invest in it anymore.

“Stagger your entry into a US fund by taking the systematic investment plan (SIP) route. Also, do not go just for the big-tech stocks, which have appreciated the most but take more diversified exposure,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

Investing in a broad, globally diversified equity fund is another option.

“It is difficult for investors in India to know which country or theme will do well in the future.

With a global fund, they can entrust this task to expert fund managers,” says Ajit Menon, chief executive officer, PGIM India Mutual Fund, which runs the PGIM India Global Equity Opportunity Fund.

Menon informs that their fund tries to capture new themes that are catching on across the globe — on-demand economy (video streaming, education on-demand, etc), cloud-based technology, data security, e-commerce, digital payment services, robotics and automation, and health tech.

For international funds to have an impact, they must make up at least 15-20 per cent of an investor’s equity portfolio.

LRS route for evolved investors

Investors may also take the liberalised remittance scheme (LRS) route, which allows them to invest up to $250,000 abroad annually per person.

They would have to open an account with one of the brokerage platforms that enable Indian investors to invest directly in markets like the US.

The key attractiveness of this route is that the investor gets more options in terms of the exchange-traded funds (ETFs) and stocks he can choose from.

“However, the tax-related compliances become more complicated,” says Luthria. Only bigger, more sophisticated investors should opt for this route.

Take exposure to gold

Having an exposure to gold can also help investors counter the rupee’s depreciation.

The international price of gold is determined in dollars.

The Indian price of gold is derived from the international dollar price.

Suppose that you have one dollar worth of gold.

And one dollar equals, say, Rs 75.

Even if the rupee depreciates from 75 to 80, with the gold that you hold you can still buy one dollar.

However, like all commodities, gold too witnesses prolonged up cycles and down cycles.

So, invest in the yellow metal for the long term and limit exposure to 10-15 per cent of portfolio.

Direct investors: Understand the nuances

Generally, a depreciating rupee benefits exporters while affecting importers adversely.

Those who run direct stock portfolios need to dig deeper to understand the impact of currency depreciation on their holdings.

“Some companies import certain raw materials and export a part of their finished goods, so the net impact on them is not high. Many hedge their net foreign exchange exposure, protecting them from wild movements in the short term. Some companies have pricing power, given the nature of their product and favourable industry structure, and are able to revise pricing to adjust for adverse currency movements,” says Jatin Khemani, founder and chief executive officer, Stalwart Investment Advisors, a Sebi-registered independent equity research firm.

He adds that instead of generalising the impact, investors need to understand each company’s business model.

“Look at how the financials moved in the past when the currency behaved wildly. That will help you understand how resilient the business model is,” adds Khemani.

Ankur Kapur, managing partner, Plutus Capital, a Sebi-registered investment advisory firm, adds: “The IT sector is likely to be a net gainer. In the case of pharma, chemicals, and paints, all of which import inputs, the impact will depend on how much they export or can raise prices. Build a portfolio diversified across sectors so that the currency impact is mitigated.”

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