Here's why you must invest in foreign assets to guard against rupee's fall

The rupee touched a low of 66.48 against the dollar on April 23, a decline of 4.41 per cent since the start of the year. The rupee's depreciation affects household budgets in several ways. One way they can counter this is by investing a part of their portfolio in foreign assets.  

The rupee's depreciation is part of a global phenomenon. "The dollar index has strengthened in the past few weeks and that has affected emerging market currencies," says Nikhil Gupta, chief economist, Motilal Oswal Securities. Several factors have led to the strengthening of the greenback. One is the growing belief that the ongoing trade war between the US and China may not escalate after all, and the impact on US GDP may not be as high as was originally feared. Second, while the US is raising interest rates and the European Central Bank (ECB) has begun to reduce bond buying, most emerging markets are not in a position to hike rates. This will lead to narrowing of the interest-rate differential between developed and emerging markets, and lead to more flows into dollar assets. 

Within India, inflationary pressures are beginning to mount. While the last monetary policy was dovish on inflation, the minutes of the Monetary Policy Committee (MPC) meeting revealed that members were worried about inflation. Inflation differential between countries is a big driver of currency movements. Also, with crude prices rising above $70 a barrel, India's trade deficit has begun to rise, and this is putting pressure on the rupee.

A weaker rupee affects household budgets in several ways. Imported items turn more expensive. Crude oil and cooking oil are two such items and their prices could rise right away. A vast array of components are also imported, such as for computers, high-definition television sets, and other electronic items. If the rupee stays low for a prolonged period of time, there will be a secondary impact, with manufacturers hiking the prices of electronic goods. "To deal with inflation, households need to monitor their expenses closely. Only then will they realise that they are getting affected, and be able to zero in on where the hit is coming from. Households also need to set up a contingency fund to be able to deal with sudden spikes in expenses," says Mumbai-based financial planner Arnav Pandya.

Nowadays, many Indian families go for vacations overseas, or have children studying abroad. A depreciating rupee plays spoilsport with their budget. Over the past 10 years, the rupee has depreciated at a compounded annual rate of 4.90 per cent against the dollar. If you are planning for a long-term goal like your child's education in a foreign university, invest about 20 per cent of your portfolio in foreign assets that can provide a hedge against the rupee's depreciation. "International funds are available in India that will protect you against the fall in the value of the rupee against the dollar. Another option is gold, which is a sound inflation hedge and also tends to rise in value if the currency falls. A third option is to invest using the Liberalised Remittance Scheme (LRS) in foreign stocks, mutual funds and exchange traded funds not available in India," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Management. Sectors like information technology and pharma also benefit from a falling rupee. Investors may bet on them after a thorough evaluation of individual stocks.