The sharp decline of the rupee against the US dollar affects most of us, directly and indirectly

On 8th October, 2018, for the first time, the rupee ended below the 74 mark against the US dollar.

Advances in the dollar overseas, along with foreign fund outflows dragged the rupee lower.

Now the question everyone is worried about is, will the decline in rupee affect your investment?

Let’s analyze the falling rupee against the dollar and its impact on your investment

Why is the rupee declining?

Here are the 5 key reasons behind this sharp reduction

Also Read: Market Crash! 11 Mistakes That You Shouldn’t Be Making (but most likely are)

1. Boiling crude oil price

As we all know, India produces just 20% crude oil and the rest is imported from other nations like Iraq, Saudi Arabia, Iran and other Gulf countries.

Crude oil is the biggest contributor in the import bill of India.

A steep rise has been observed in the crude oil prices from late June 2017.

Crude oil prices gained 26% this year and reached $86 per barrel, stretching India’s current account deficit (CAD) and contributing to the rupee’s 13.4% decline that makes it Asia’s worst performer in 2018.

2. Trade war between USA and China

For more than six months, USA and China have been involved in a heated trade war, as these countries are imposing import tariffs on each other’s goods.

Both nations have triggered a situation of trade war, which is not adaptable for countries like India.

Initially, US President Donald Trump imposed tariffs on a number of Chinese goods worth billions, following which, in a retaliatory manner, China too imposed tariffs on American products and raised duties on several goods.

The trade war is leading the market into a period of risk, where prices of all assets are moving lower.

Indian Rupee is already under pressure from high crude oil prices and the ongoing trade war is sparking another bout of capital outflow.

3. Fiscal deficit blues

On the back of ballooning crude oil prices, restriction of crude oil imports from Iran and renewed trade war tensions, experts believe that these may hurt India’s fiscal deficit over the upcoming quarters.

Also because, India is a net importer of crude oil and heavily dependent on it.

Weakness in the Indian Rupee is expected to persist, as it will be difficult to fund the widening current account deficit, given the increased return of higher US Dollar.

4. FPI outflows

FPIs (Foreign Portfolio Investors) have emerged as net sellers in the first quarter of FY19 .

When foreign investors find other attractive markets in, other parts of the world; they pull out their invested money by selling their equity shares.

But they demand the most respected currency or easily accepted money i.e. dollar. In such a situation, the demand for dollar increases which further increases its price.

What is the impact of depreciating rupee on your investment?

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.

Here are some noticeable impacts

1.Increase in bond yields

Falling rupee will keep bond yields at a higher level and may force authorities to raise interest rates.

This high-interest rate can arrest the fall, by attracting foreign capital.

This, however, will adversely impact long-term debt funds as their net asset value(NAV) and returns fall when interest rates go up.

In addition, it will affect the performance of the government bond schemes in the NPS.

Higher interest rates will also hurt borrowers. So, your home loan EMIs could go up. Foreign travel and foreign education expenses may also rise.

2. Beneficial for foreign stock investors

Investors of mutual funds, that have exposure to foreign stocks gain when the rupee depreciates.

As such, international funds have two dimension of returns – the performance of the foreign stock and currency movement. In the last few years, investors of international funds have benefited largely, from the rupee’s depreciation.

Read more: See how rupee’s decline affects Parag Parikh Mutual Fund

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.

3.Decrease in the price of gold

Dollar appreciation brings down the international gold price.

Currently, it is below $1,200/troy ounce, a 34-month low.

Gold accounts form a big part of the current account deficit, so the government may take further measures to stem its import, cushioning the domestic price.

4.Beneficial for NRIs

Depreciating rupee is good for NRIs who repatriate money home as the dollar is now more valuable. They may consider increasing their Indian investments when the rupee is weak.

5. Bummer for the real estate industry

The biggest casualty of rupee volatility is the expected rate cuts by the RBI.

This may reduce the demand and holding power of builders.

So, it’s negative as far as the real estate prices are concerned.

NRIs are the major consumers of Indian real estate and rupee depreciation makes it more affordable for them. This may raise realty demand.

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.

Also Read: What led to the recent market fall? An investor’s perspective

Will the rupee strengthen?

When you have a currency like the rupee hitting an all-time low, there is really no yardstick or measure that you can look at.

According to Economic Times, the rupee could slide to at least 75 against the dollar by March, as robust growth propels US interest rates to their highest in seven years.

Also, crude oil prices have surged the most since 2014, ahead of next month’s Washington-enforced supply curbs on Iran.

One of the main things we look at is an estimation of the fair value of the rupee to give us an idea of whether or not it has been overshot.

Based on our assessment of financial analysts, the rupee even at current levels is still overvalued.

Fair value is more towards the 74 level and in the current environment, it is possible to see the currency actually overshoot.

So, a further decline of the rupee from the current levels seem imminent due to its overvaluation in real terms.

However, availability of large foreign-exchange reserves will help the RBI defend the rupee against any steep depreciation through intervention in the currency market.

At the end of March 2018, RBI’s total foreign exchange reserves stood at $424.5 billion (around Rs 29 lakh crore).

Top 3 funds you can invest in

With the rupee expected to go down further, what are the sectors that one can bet on?

The depreciating rupee can be good for export-focused companies.

Hence, net exporters like information technology and pharmaceutical companies with a large exposure to the US stand to benefit the most.

Here are the top 3 performers which are taking advantage of the depreciating rupee

1. ICICI Prudential Technology Fund – Direct – Growth

Technological companies are the biggest gainers of the year.

With rupee expected to depreciate further, sectoral funds investing in technological companies seem a good bet.

Key information

Launch Date 1 January 2013
NAV (8th Oct 2018) ₹62.6
Plan Type Direct
Rating by Groww 5 Star
AUM (Fund Size) ₹391 Cr
Riskometer High
Minimum SIP ₹1,000
Minimum SWP ₹500
Performance w.r.t its Benchmark Has consistently outperformed its benchmark S&P BSE IT TRI since its launch.
Age of the fund 5 years old
Expense Ratio 1.76%
Exit Load If redeemed bet. 0 Year to 1 Year; Exit Load is 1%;
Type  Open Ended

Performance over the years

Duration Returns
1 year 46.6%
3 years 13.1%
5 years 19.4%
Since launch 23.6%

2. Reliance Pharma Fund – Direct – Growth

Pharma sector is another sector which benefited most from declining rupee.

Key information

Launch Date 1 January 2013
NAV (8th Oct 2018) ₹159
Plan Type Direct
Rating by Groww 5 Star
AUM (Fund Size) ₹2,144 Cr
Riskometer High
Minimum SIP ₹500
Minimum SWP ₹100
Performance w.r.t its Benchmark Has consistently outperformed its benchmark S&P BSE Healthcare TRI since its launch.
Age of the fund 5 years old
Expense Ratio 1.42%
Exit Load If redeemed bet. 0 Year to 1 Year; Exit Load is 1%;
Type  Open Ended

Performance over the years

Duration Returns
1 year 18.7%
3 years 0.4%
5 years 16.6%
Since launch 15.3%

The aim of this fund is to generate consistent returns by investing in equity or fixed income securities of pharma and other associated companies.

3. Parag Parikh Long Term Equity Fund – Direct Growth

With the rupee hitting its lowest value, many mutual fund investors are inquiring about Parag Parikh Long Term Equity Fund.

This long-term equity fund has the flexibility to invest in Indian and foreign companies, irrespective of market capitalization and sectors.

Key information

Launch Date 24 May 2013
NAV (18 June 2018) ₹25.6
Plan Type Direct
Rating by Groww 4 Star
AUM (Fund Size) ₹1,107 Cr
Riskometer Very High
Minimum SIP ₹1,000
Minimum SWP ₹1,000
Performance w.r.t its Benchmark Has consistently outperformed its benchmark NIFTY 500 since its launch.
Age of the fund 5 years old
Expense Ratio 1.50%
Exit Load If redeemed bet. 0 Days to 365 Days; Exit Load is 2%; If redeemed bet. 365 Days to 730 Days; Exit Load is 1%;
Type  Open Ended

This fund has given a very good return since its launch and is less risky in the multi-cap category, due to its additional diversification.

Performance over the years

Duration Returns
1 year 8.2%
3 years 13.6%
5 years 18.9%
Since launch 19.3%

Parag Parikh Long Term Equity Fund is a diversified equity scheme with the investment objective of generating long-term capital growth from an actively managed portfolio, primarily of equity and equity-related securities.

This fund’s allocation is guided by good opportunities to diversify.

They get to diversify their portfolio holding by investing up to 35% of the fund’s asset in foreign stocks.

In order to retain its status as an Indian equity mutual fund, this scheme invests at least 65% in domestic stocks.

The ideal tenure of investment is more than 5 years, if you want potential returns from this fund.

Conclusion

It is quite possible that the rupee will weaken further if the sentiment towards equity market does not improve.

When compared over a period, a weakening rupee can make your household expenditure, foreign travel and education more expensive.

Your long-term investment portfolio is not likely to be impacted by rupee depreciation.

However, investment in foreign funds could benefit, provided the foreign stocks in the funds perform well too.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww