Rupee falls by 12% Vs dollar in 5 years – How to benefit by investing in US stocks?

Find out how a fall in Indian Rupee against US Dollar has benefited Indian investors investing abroad.

With the sharp rise in September, merchandise imports in the first half of this fiscal stood at 6 billion, up 81.7% from a year ago and 11.3% from the pre-Covid level.
With the sharp rise in September, merchandise imports in the first half of this fiscal stood at $276 billion, up 81.7% from a year ago and 11.3% from the pre-Covid level.

Investing in US stocks has the potential to have a positive impact on two fronts. One, if the stocks you buy go up and secondly on the rupee-dollar exchange rate. Investing in US stocks also provides the necessary diversification to your Indian portfolio while at the same time gives you the advantage to benefit out of the sliding rupee as against the value of the US dollar.

Dow 30, Nasdaq 100 and S&P 500 over the last 5 years have gained over 16.03 per cent, 25.89 per cent and 17.27 per cent, respectively. During this period, the Indian Rupee (INR) has weakened by almost 12 per cent against the US Dollar. A weaker rupee adds to the value of your investment made in the US stocks.

While buying US stocks with INR, you have to first convert the Indian Rupee into Dollars and similarly at the time of bringing redemption value back to the Indian bank account, the conversion back into INR happens. “ If the currency of the holding asset, in this case US stocks, appreciates then there is additional return on top of the holding period return in the asset. A weaker rupee – which means a stronger dollar – would add to the US stocks return. Let’s say, there is a 5% appreciation in the S&P 500 in a year and the dollar appreciates by 2% in the same year. Then the return would be 5% plus 2% approximately in INR terms for an investment in the S&P 500 index, says Anup Bansal, Chief Investment Officer, Scripbox.

Bansal shares a practical example of how a fall in INR has benefited Indian investors investing abroad.

On 30th Sep 2016, the Nasdaq 100 was at 4875.7 and the USD was 66.55 Rupee. If one had invested in one unit of Nasdaq 100 index converting INR into USD, then the holding value in INR terms would have been Rs. 3,24,478. On 1st of October 2021, the Nasdaq 100 was at 14792 and the USD was 74.13. The holding value in INR terms after 5 years is Rs. 10,96,536 i.e. a net gain of 238% in INR.

This can be split into a 203% gain in Nasdaq 100 from 4875.7 to 14792, 11.4% gain in INR from 66.55 to 74.13 and a currency interaction effect of 23%. Mathematically, the formula for the total gain in local currency is (1+Return in foreign asset)*(1+Return in foreign currency) -1.

But, while investing abroad, the INR-Dollar equation should not be the only criteria to invest your money. A weaker rupee comes as an added advantage and need not be the only reason to buy US stocks. “ If the investment is a long-term buy and hold decision, then the decision should be made based on the economic prospects of the foreign country. In the long run, any country’s currency moves higher in value if the economic prospects have improved. So the investment in foreign assets should not be made on the prospects of the foreign currency,” says Bansal.

“India is an energy and commodities importer and when commodity prices rise, more often than not we see the rupee depreciating. Therefore having a currency hedge extent is useful,” adds Bansal.

Buying US stocks from India will keep benefiting Indians in the long run. Time to gain from a weaker rupee and reap the benefit in the long term. But, remember, selection of the right US stock or ETF is the key to make full use of international investing.

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First published on: 07-10-2021 at 14:27 IST