The Indian rupee has been labelled as the ‘worst performing’ currency in Asia. It is taken as a setback to India’s prospects for growth. Foreigners sold Indian shares and bonds aggressively in October 2018 and have been mostly sellers in 2018.
The Indian rupee has consistently been on a secular decline against the US dollar since independence. However, up to 1993, the Indian government fixed the rupee rate against the US dollar. Since then, the rupee value is determined pretty much by market forces. By this, we mean the demand and supply. India has mostly had a current account deficit. This means, for most of the global trade history, India owes foreign exchange to other countries. This keeps the demand for other currencies higher.
With India’s oil import bill soaring due to rising oil prices, the demand for US dollar rose. At the same time, the US dollar gained strength due to rising US interest rates. When US interest rates rise, international investors tend to buy US government bonds than overseas ones. There is also an impact on international investors ability to buy foreign equities. This is called a fall in the investor risk appetite.
From a personal finance standpoint, it is important to take a big picture view. Currency markets and prices are not a function of one country. There are cross-currency headwinds and tailwinds.
The most important factor for the rupee’s consistent fall against the US dollar is the differential between the inflation rate between India and the US. The rupee drops in value every year according to this differential rate.
According to one analysis by HDFC Mutual Fund, in the past 10 years, India’s average annual inflation rate has remained around 8 per cent, while that of the US around 1.7 per cent. The differential of 6.3 per cent has been consistent. Now, the rupee has depreciated every year by 6.5 per cent on an average. If you extend that to 20 years, the average difference between the US and Indian inflation rate was 4.5 per cent and the rupee has depreciated each year by 3.2 per cent.
In summary, there is nothing wrong about the rupee fall if you look at the history of the inflation rate differential between the US and India and the value of the rupee against the US dollar.
The other key factor is the impact on prospects for future corporate profitability of Indian companies. Since the beginning of this year, analysts have constantly put out an impact analysis. The rupee depreciation has neutral to positive impact, according to an analysis of Nifty 50 companies. In fact, nearly half of the companies in the NSE Nifty benefit due to the rupee depreciation. This is because their revenue is through exports of services and goods and earn it in foreign currency. The other half has actually no impact on future profits. As a result of this, domestic investors have consistently stayed invested in Indian equities even as foreigners pulled out money. This matters to equity investors in India.
What you should do
If you are an investor in equity markets, currency headwinds should not matter to you if you are invested in stocks that earn their revenue and income through exports. Large companies are good at managing currency fluctuations. You may want to stick with them. As a mutual fund investor, in the year ahead, you can align your investments towards diversified equity funds. If you are a beginner in equity markets, you may want to start with Nifty or Sensex exchange-traded funds.
The best thing to do is to speak to a financial advisor and understand these investment ideas. There is enough literature available online. First, read up as much as you can. Then you may want to move to discuss these investments with your advisor.
This column would like to reiterate that the objective of investing has to be to beat inflation consistently over a long period of time. For this to happen, regularly investing in equity or equity-linked investment helps in beating inflation.
(The writer is editor and publisher at Simplus Information Services)
When currency erodes
If you are an investor in equity markets, currency headwinds should not matter to you if you are invested in stocks that earn their revenue through exports. Large companies are good at managing currency fluctuations
As a mutual fund investor, in the year ahead, you can align your investments towards diversified equity funds
If you are a beginner in equity markets, you may want to start with Nifty or Sensex exchange-traded funds