Defend your portfolio against the rupee fall

The rupee's fall takes a toll on your investments in more ways than one. Here's how to protect yourself.

India's rupee plunged to its lowest levels ever on Wednesday after Reserve Bank of India's mixed review sent speculators scurrying for cover. The rupee breached the 61-dollar mark, but later recovered to around Rs 60.37. The central banker's liquidity tightening measures hasn't managed to the curb the speculation on the rupee. RBI's lower economic growth outlook to 5% further exacerbated sentiments. 

 

Ever since the US Fed announced the tapering of quantitative easing, foreign investors ran for the door as they dumped Indian bonds worth Rs 43380 cr and to some extent equity (Rs 16616 cr). The sell-off drove the rupee down 7% in the last two months.  

 

There's a fear that the rupee could stay volatile as despite all the RBI measures of the last two weeks, the rupee plunged to its all time low. Says Lakshmi Iyer, Head fixed income, Kotak Mutual Fund: “Despite all the best efforts, the rupee has fallen further so one just can't say what can happen next. But the worst might be behind us.” 

 

Even then, several challenges remain for the Indian economy and the biggest one is growth. There's also the fear that inflation could squeeze the Indian economy. The RBI in its credit policy statement said that “the sharp depreciation of the rupee since mid-May is expected to pass through in the months ahead to domestic fuel inflation as well as to non-food manufactured products inflation through its import content.”

 

This will put a lot of stress on your finances. Firstly, a higher inflation in imported products such as oil will reduce your purchasing power as the same rupee will buy fewer goods. Secondly, consumption reduces and hurts economic recovery. Debt funds are in the red, and investments in equity tend to stagnate. 

 

But what can investors do? Start by looking at international funds that help you diversify from rupee investments into dollar assets. There are many international funds that invest across geographies such as US or other emerging markets. 

 

International equity funds particularly in countries where there's economic growth tend to do well as they increase in value. Further, a fall in the rupee means investors can make further rupee gains. Says Dhirendra Kumar, CEO, Value Research Online: “International equity funds are better way of diversifying investments. Investors participate in the growth of global companies.”

 

Tilt your portfolio towards companies that have a substantial amount of foreign exchange earnings. Forex earners are far more likely to report a higher revenue and profit growth as their products become cheaper overseas and margins are kept intact. Sectors such as IT, FMCG and Pharma stand a better chance of withstanding the rupee's fall. These funds have returned 31.2%, 14.8% and 11.6% respectively last year. 

 

Till the rupee stabilises, bond funds could remain volatile. This could drive yields higher and bond NAVs lower. However, once the rupee stabilises, bond fund might begin to look attractive again as yields on the 10-year g-sec are up 16% since May 24 to around 8.13%. So invest in these funds slowly over time. Says Iyer: “I would still a large chunk of my money in long-term bond funds, but I would stagger my investments.”