Rupee weakens vs US dollar: Diversify into global funds, gold to hedge risk

Doing so is crucial for those who have dollar-denominated goals, like a child's education abroad

The Indian rupee has been under sustained pressure, closing at 88.79 against the US dollar on October 6. Multiple factors, including capital outflows and weak exports, are weighing on the currency. For households and investors with foreign currency-denominated goals, the key question now is how to safeguard their finances in this environment of a weakening rupee.

 

What’s driving the fall 

India relies heavily on foreign capital inflows to finance its current account deficit. When higher US interest rates trigger outflows to safer dollar assets, the Indian rupee (INR) weakens against the US dollar (USD). “Elevated global crude oil prices and widening trade deficits push up import bills, further straining the INR,” says Abhishek Kumar, Securities and Exchange Board of India (Sebi)-registered investment adviser (RIA) and founder, SahajMoney.com.

 

Other factors have worsened the slide. “A surge in dollar demand from jewellers as precious metal imports nearly doubled in September, weak exports to the US, negative sentiment from visa fee hikes, and heavy foreign portfolio investor (FPI) equity outflows of over $2 billion in late September have weakened the Indian rupee against the dollar,” says Jyoti Prakash, managing partner, equity and portfolio management services (PMS), AlphaaMoney.

 

Impact on households 

As India relies heavily on imports, a weaker rupee makes goods such as fuel, electronics, medicines, gold, and machinery more expensive. “It also makes overseas travel and foreign education of children costlier,” says Kumar.

 

“Students, travellers, and firms with unhedged dollar debt may feel an immediate impact,” says Vijay Kuppa, chief executive officer (CEO), InCred Money.

 

Chanchal Agarwal, chief investment officer (CIO), Equirus Family Office, adds that while the direct effect on households is limited, companies may eventually pass on higher costs. 

 

Diversify through global exposure 

Experts suggest holding some dollar-linked assets to cushion portfolios. When the rupee falls, such assets — including international funds, gold, and commodities — tend to gain.

 

According to Kuppa, conservative investors should have a 0–10 per cent exposure to international equities, moderate investors 10–20 per cent, and aggressive investors 20 per cent or more.

 

“Allocating 10–15 per cent of one’s portfolio to international or dollar assets not only reduces concentration in domestic markets but also provides exposure to global opportunities,” adds Santosh Joseph, chief executive officer (CEO), Germinate Investor Services.

 

Gold as a hedge 

Gold is priced in dollars in the international market. “Rising international gold prices translate into even higher domestic prices with a weak rupee,” says Prakash.

 

Joseph suggests that those who have not invested yet should allocate about 10 per cent to the yellow metal. “Gold not only provides exposure to dollar assets and international diversification but also reduces portfolio volatility. Its role in risk mitigation and diversification makes it a valuable long-term holding,” says Joseph.

 

Agarwal recommends a smaller allocation of 2–3 per cent. “Unlike assets that grow over time, currencies only reflect relative strength. Anyone who invests in gold as an asset pays a holding cost,” he says.

 

Currency hedging is for savvy investors 

Investors can use currency futures and options to hedge dollar exposure, but these tools are risky. “For most, it’s safer and more effective to gain exposure through direct dollar assets, which provide both diversification and portfolio stability,” says Joseph. He adds that only experienced investors who understand currency dynamics should use derivatives.