Rupee's weakness: Achieve dollar goals with US funds and gold in portfolio

The rupee hit a new low of Rs 84.5 against the US dollar recently. While the Indian currency is down only 1.3 per cent year-to-date, over the medium and long term, the fall has been sharper: 3.3 per cent compounded annually over five years and 3.1 per cent over 10 years.

 

What caused the fall?

 

The primary cause of the rupee’s fall against the US dollar is the latter’s broad-based strengthening against major global currencies. This trend accelerated following Donald Trump’s victory.

 

“Investors remember his first term when he implemented pro-growth policies, such as significant corporate tax cuts, which benefited corporate America. Investors anticipate aggressive policies from him that could spur growth in the US economy,” says Sapna Narang, managing partner, Capital League.

 

 

“The expectation that Trump might impose high tariffs on imports into the US is also supporting the US dollar,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

 

US corporate performance has bolstered the dollar.

 

“In the recently announced third-quarter earnings, over 70 per cent of US companies posted results that exceeded market expectations. The strength of these earnings has reinforced confidence in the US economy and corporate sector, attracting global capital,” says Narang.

 

Outflows from the Indian capital market have also played a part, driven by overvaluation in the Indian market, the economic stimulus in China, and persisting high interest rates in the US due to expectations of increased government spending, tax reductions, and slower rate cuts. 

 

Long-term phenomenon

 

The rupee’s depreciation against the US dollar is also a long-term trend. “Countries with higher productivity, lower trade deficits, and lower inflation have stronger currencies,” says Abhishek Kumar, a Securities and Exchange Board of India (Sebi)-registered investment adviser and founder, SahajMoney.com.

 

If India’s inflation is 6 per cent and the US’s is 4 per cent, the rupee tends to weaken by the 2 percentage point differential.

 

Dollar goals impacted

 

All goals involving dollar-denominated spending become more expensive. These include foreign education, overseas vacations, and financial support to family members abroad. “Even the cost of purchasing commodities like gold, used heavily in Indian weddings, increases,” says Kumar.

 

Invest in US equity funds

 

Investments in US equity funds, which are denominated in dollars, benefit from currency depreciation. If the rupee weakens, the dollar value increases, generating returns even if the underlying US asset prices remain unchanged. Kumar says investing in US equity funds provides the added benefit of geographic diversification.

 

“The exposure to US equity funds should be capped at 10-20 per cent,” says Dhawan. He advises using systematic investment plans (SIPs) or systematic transfer plans (STPs) to mitigate valuation risk. Investors should avoid overinvesting in US equities based on recent performance.

 

Add gold to portfolio

 

Gold, priced in US dollars in the international market, serves as a hedge against currency depreciation. “When the rupee depreciates, the value of gold in rupee terms increases, providing a hedge against currency depreciation,” says Narang.

 

Dhawan cautions against overexposure.

 

“If interest rates in the US rise, that could hurt gold prices. A 5-10 per cent exposure to gold is adequate to hedge against currency risk,” he says. 

Investors may use gold exchange-traded funds (ETFs) or mutual funds, depending on their comfort level and whether they have a demat account. Kumar recommends gold mutual funds for ease of access and liquidity. Invest in gold through SIP or STP as well.