Historically, Indian Rupee has exhibited weakness against the US dollar. In 2017 you had to shell out Rs 64 to buy a dollar but now you need Rs 81, thus reflecting a weaker INR. One of the many ways to negate or offset the impact of a stronger dollar is by owning assets denominated in dollar. Investors can diversify their portfolios by investing in US stocks and ETFs with a long-term objective. “The depreciation of the rupee against the dollar effectively adds to the returns on US equity investments,” says Viram Shah, Co-founder and CEO, Vested Finance.
Any fall or rise in the value of INR against the dollar will have direct implications on the portfolio returns. “The rupee depreciation adds to the returns but should not be the sole reason for investing in the US markets. It’s difficult to predict currency movements in the short to medium term. Over the last decade, the returns in the US stock markets and Indian stock markets have been comparable, but due to the rupee depreciation, investments in the US markets would have meant additional returns for Indian investors,” adds Shah.
Shah shares an example of how investment in the US stock market helps in enhancing portfolio returns due to a weaker Rupee against the dollar – Over one year, the rupee has depreciated by approximately 6.5% against the dollar, and over three years, the rupee has depreciated approximately by 13.9% against the dollar.
Let us assume that you invested $100 in S&P 500 ten years ago. Then the rupee was at Rs 54.4 against a dollar. So your total investment was worth approximately Rs. 5,440. Over the last decade, the S&P 500 has given returns of about 13%.
So your investments are now worth about $339. Since the rupee is at 79.8 against a dollar now, your investment is worth about Rs. 27,000. Hence, your effective returns are over 17% due to the rupee depreciation.
When INR falls against dollar, and even the returns from your US stock fall, the percentage loss gets minimized. Shah explains with an example:
Let us take the example of Microsoft.
Microsoft share price on July 19 2021 – $277.01
Microsoft share price on July 18 2022- $254.25
Change in share price: – 8.22%
Value of one Microsoft share on July 19 last year – Rs. 20,644 (1 dollar = Rs. 74.6)
Value of one Microsoft share on July 18 2022 – Rs. 20,289 (1 dollar = Rs. 79.8)
% loss in investment after factoring in rupee depreciation: -1.71%
So, the losses are reduced by the percentage of rupee depreciation.
(Calculations are indicative and may not be an exact figure)