Rupee has depreciated by around 8% against the US dollar since the beginning of the year. And while the Indian economy is suffering because of the sharp drop in the value of the Indian currency vis-a-vis the US, it is also impacting your finances and investment portfolio.
Rupee depreciation is impacting your portfolio either directly or through the measures that the government is taking to curb the fall of rupee. We enlist the likely impact on your finances due to the depreciation of rupee against dollar.
Imported inflation
As much as 86% of Indian imports are invoiced in dollars. Therefore, when the rupee depreciates against the US dollar, imports become costlier in rupee terms. This increases inflationary pressure in India, and manufacturers who buy costlier raw materials begin to pass on the cost to the end consumer. Rupee depreciation coupled with higher crude oil prices in the global markets have been a double blow for common man already with very high fuel prices in the domestic market. The retail inflation has been trending over 7% since April, and it might very well remain in those levels for another quarter.
Costly international travel or overseas education
A depreciating rupee may adversely impact international travel or overseas studies as the Indian rupee would buy less foreign currency than earlier in foreign destinations.
“The rupee depreciation increases the burden on aspirational Indians who are aiming to send their children abroad for higher education and make remittances for their living costs and other expenses,” says Raj Gandhi, co-founder of DollarBull, a financial investment firm that facilitates international equity investment.
However, it is also to be noted that Indian currency had not depreciated against many major global currencies. In fact, in some cases, it has appreciated against currencies like Euro, Yen and pound sterling. Therefore, travel and study trips to Europe and Japan may not be expensive for the Indian travellers, students.
Benefit for Indians working overseas
India is one of the biggest receivers of remittances from the population working overseas. In 2021, Indians working overseas sent $87 billion to India. As rupee depreciates against USD, NRIs gain from their holding in dollar assets.
The RBI recently eased the restrictions on interest rates offered by banks on Non-Resident External (NRE) deposits as well as Foreign Currency Non-Resident (FCNR) Fixed deposits. After the RBI circular on easing interest rate caps, banks have been increasing interest rates by as much as 105 basis points on foreign currency deposits.
These deposits would not only earn higher interest, they are also tax-free and fully repatriable.
“There is an increased interest in FCNR and NRE deposits as banks have increased rates on such deposits. They are also tax-free, and therefore, NRIs will increase allocation to these deposits,” says Yogesh Kalwani, head of investment, InCred Wealth.
Impact on investment portfolio
Rupee depreciation benefits exporters as their exports become more competitive and they earn higher dollar revenue. If your investment portfolio has these companies, you might get positively impacted by depreciation of rupee.
“Since India is a significant tech, pharma and automobile exporter to the US, these sectors stand to gain in times of Rupee depreciation. Going forward, if this trend continues exports as a theme is likely to perform well,” says Chintan Haria, Head Product & Strategy, ICICI Prudential Mutual Fund.
However, a lot of Indian companies depend on imported raw material, and their margins might get impacted.
Important points to note
Rupee has depreciated by 8% against the US dollar since January 2022.
Domestic companies with large exports to US markets — IT, Pharma and Auto firms — may gain from a weak rupee.
RBI has relaxed the cap on FCNR and NRE deposit interest rates to attract more foreign currency deposits.
Rupee has appreciated against other major global currencies like the Euro, Japanese Yen and Pound Sterling.
Domestic companies which depend on imported raw materials likely to get negatively impacted by rupee depreciation.