Game On In Currencies – INR Hit 85 to a Dollar!

After Trump’s win, the US stock market is on a roll, and Bitcoin has hit 100,000 USD. This may or may not affect our lives, so who cares?

We must care about the depreciation of our currency, though, as it impacts our lives—sometimes directly, like rising petrol prices, or indirectly, like imported goods becoming expensive, fuelling inflation.

So, how much has the currency depreciated?  The chart below shows that we have outperformed many of our emerging market peers.

We can take heart that we are not the only ones with a weakening currency all thanks to our good macros and the Reserve Bank of India’s deft handling, we have defended our INR. However, we have depleted some of our reserves and are trying to curb the depreciation.

India is a net importer of goods worldwide, so Indian businessmen need more dollars to pay for imports than they get from exports. The demand for dollars is high, increasing its price vis a vis the Rupee.

Purchasing power parity (PPP) is essential in understanding how inflation affects the value of a currency value.

It says that the same basket of goods should cost the same in two countries. Any difference is reflected in the exchange rate.

Say a basket of goods costs 200 dollars in the US, but the same basket costs 100 pounds in the UK. Then, the exchange rate would be 2 dollars for 1 pound.

If US inflation is 5% and UK inflation is zero, the same basket of goods will cost 210 dollars in the US against 100 pounds in the UK next year.

Thus, the value of 1 pound to a dollar would go up to 2.10. The pound would become stronger, and the dollar would become weaker.

Controlling inflation, therefore, is very important for a stable currency.

After Trump’s win, there is a strong global wave of American exceptionalism, the belief that the US would surmount all odds, be superior in all aspects, and economically do well. US dollars are flowing back to the US to be invested in US stocks, bonds, and what have you other investments. This has created a great demand for dollars, which is depreciating home currencies.

Foreigners have been continuously selling in the Indian stock markets. Trump’s policies will likely fuel inflation, reducing the chances of US rate cuts. If the US promises a higher yield, investors may flock back to the US again, strengthening the US dollar.

India’s growth, which has started to flounder to 5.4%, is not helping matters.

Experts agree that India’s and other currencies will depreciate over the next year. How can we insulate our portfolios or benefit from this? Listed below are some ways; please note that the products mentioned are indicative, not recommendations.

Geographical diversification – Invest in other countries or the US via direct stock investments or Indian mutual funds investing in global funds. Most large Indian brokers offer this service.  Currently, there are RBI restrictions on inflows of international mutual funds & ETFs.  Nonetheless, for future reference, some examples are Motilal Nasdaq 100 fof fund or ETF, ICICI prudential US Bluechip fund.

Investing in Gold – Gold is denominated in US dollars, so any rise in USD will increase the price of gold in INR. Examples of some instruments to invest in electronic gold are Goldbees, Ipru gold ETF, SBI gold fund, and HDFC gold fund.

Invest in exporters, such as the Indian Tech sector or pharmaceutical companies, that earn in foreign currencies. Edelweiss Technology fund, Tata Digital India fund, SBI Technology fund, Nippon Pharma fund, Tata India Pharma & Healthcare fund.

Currency movements are tricky to explain because everything in the world impacts them. While some factors can be pinpointed, the exercise is always complicated.

While currency moves are unpredictable, catching a part of the move right can protect us and profit from the downside.