The big decline in the exchange rate of the Indian Rupee (INR) against the US Dollar (USD) is helping Indian investors who have invested abroad. History shows that INR has continuously weakened against USD over the long term. Back in 2017, the INR-USD rate was Rs 64, while as of 1.30 pm on September 30, 2022, it was at Rs 81.5522 (RBI website). This is close to a 5% annualized return, more than a savings bank account! Since January 2022, the Rupee has fallen almost 9% against the USD.
For better understanding, here’s why it is called the weakening of Rupee – In 2017, you needed Rs 74 to buy a dollar but today you need Rs 81! As you have to shell out from your pocket to buy a dollar, it means the dollar has strengthened and Rupee got weaker.
A direct impact of a weaker INR is on those who are buying dollars (using INR) to remit or invest abroad. When the dollar is to be brought back and gets converted to INR, these investors stand to gain. Using the same rate as above, instead of Rs 74, now investors will get Rs 81.5 for every dollar they convert to INR.
The Indian Rupee has historically shown weakness when compared to the US currency. So, even though the INR has crossed Rs 81 to a dollar, the rupee depreciation against the dollar works in favour of investors. The returns on US equity investments are effectively increased by the rupee’s fall against the dollar.
Let us assume that you invested $100 in stock 10 years ago when the rupee was at Rs 52 against a dollar. So your total investment was worth approximately Rs. 5,200. Over the last decade, the stock gave returns of about 12% CAGR.
So your investments are now worth about $311. Since the rupee is at 81.5 against a dollar now, your investment is worth about Rs. 25,000. Hence, your effective returns are 17%, and the additional 5% is due to the rupee depreciation.
Similarly, if the US investments are in red, the downside gets protected to the amount of fall in INR against USD.
Investing in US stocks should not be solely on the basis of currency advantage. The benefit, of currency depreciation, should only be considered as a fringe benefit to your portfolio.