How does the depreciating rupee impact your finances

Updated: August 24, 2018 11:51:16 AM

A depreciating rupee is good for NRIs repatriating money home as the dollars are now more valuable. They may consider increasing their India investments when the rupee is weak.

Rupee depreciation would not impact your long-term portfolio if it is well-diversified.

The rupee slid to the 70 a dollar mark last week and continues to hover close to that mark. The currency has had a gradual depreciation of over 9% this calendar year. What implication does the rupee’s depreciation have for your finances?

Before we explore the impact, do bear in mind that exchange rate movements are usually small and gradual. Abrupt jumps in foreign exchange rates are rare and hence the effects of currency depreciation or appreciation are not generally observed in a few days or weeks. However, taken over years, or sometimes even months, the differences are noticeable and, therefore, can impact your finances.

Exchange rate affects exports and imports

The direct and immediate impact of the exchange rate is on the exports and imports of a country. When the rupee depreciates, it loses value with respect to the dollar. This means it takes more rupees to exchange with a dollar.

Most of the international trade happens in US dollars. Therefore, as rupee depreciates, exports become more profitable, because the exporter earns more rupees for exchanging dollar. On the other hand, imports become expensive as the importer needs to pay more rupees for the dollars billed. Industries linked to exports like pharma and IT benefit with depreciation, whereas those industries linked to imports (or having vital components of their product imported) have to bear higher input cost, which is ultimately passed on to the end users.

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Petroleum is India’s largest import item. Any price rise in petroleum has a trickle-down effect on the cost of goods where transportation is an important component of the cost. For example, food grains and vegetables. Similarly, for industries where petroleum products are the major input factors.

Therefore, to the extent that depreciation makes the cost of some things on your household consumption list more expensive, your purse strings will have to be loosened as the rupee weakens.

Rupee weakening and investments

Often when exchange rates cross a threshold, the stock markets get jittery and turn volatile. However, such market movements are temporary, and the markets tend to revert soon.

A depreciating rupee is good for NRIs repatriating money home as the dollars are now more valuable. They may consider increasing their India investments when the rupee is weak.

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Investors of mutual funds having exposure to foreign stocks gain when the rupee depreciates. As such, international funds have two dimensions of returns – the performance of the foreign stocks and currency movement. In the last few years, investors of international funds have benefitted much from the rupee’s depreciation.

Depreciation by itself would not impact your long-term portfolio if it is a well-diversified one. Nevertheless, individual stocks may see short-term price movements, if they are in the export or import business, or are financing them.

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While planning investments for goals such as foreign education or travel, bear in mind that rupee depreciation might impact the allocation you have to make towards these goals. Tuition fee, accommodation and other living expenses would cost more in rupee terms as the rupee weakens. Similarly, your foreign trip would cost more, making shopping and other local spends more expensive. So, evaluate whether your current investments for these goals need to be hiked and make adjustments accordingly.

All in all, when compared over a period, a weakening rupee can make your household spends, foreign travel and education more expensive. It is a good idea to include the effect of rupee depreciation while planning goals involving foreign spends. Your long-term mutual fund investment portfolio is not likely to be impacted by rupee depreciation. However, investments in foreign funds could benefit, provided the foreign stocks in the fund perform well too.

( Written by Mr Amar Pandit, founder of HappynessFactory.in)

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