Your international investments appreciate as the rupee weakens
The headlines are telling us that our rupee hit an all-time low against the greenback. That may seem to imply that our economy is not doing well or there may be something fundamentally wrong, or you may have to look at your investment portfolio in this context. It is not so.
Yes, we import consumption items and capital goods. And we import crude oil, which makes for a big chunk of the import bill. We export as well, but less than imports. That leaves us with a current account deficit (CAD). That makes us dependent on foreign inflows.
Foreign inflows do come in, in the form of foreign direct investments (FDI), foreign portfolio investments (FPI) and NRI remittances from abroad. By virtue of these inflows, we manage at the overall level, which is called balance of payments (BoP). However, the fact that we have a CAD necessitates that we keep the price of our exports competitive. The weakening of our currency is a means or outcome of this.
Competitive devaluation
Take heart. Not only India, but most countriesare doing it, something known as competitive devaluation. In particular the Asian economies, since that is the peer group for us. As long as the pace of weakening is gradual, and at par with the competition peer group, there is no need for alarm.
Where does the Reserve Bank of India (RBI) fit in the picture? It is one of the objectives of the RBI to manage the currency and exchange rate. And that it does. This is not to be confused with the weakening of the rupee against the dollar. It is not possible to defend a particular level. The RBI takes care that any movement in currency exchange rate should not be too sharp or in a short span of time. The RBI steps in to manage extreme volatility. Today our forex reserves are healthy, more than $600 billion. If there is a sudden outflow of forex or sharp weakening, the RBI will step in.
Investment portfolio
What does this mean for your investment portfolio? Given the view that the rupee will gradually weaken, you can get the benefit from investment in international assets. Returns from your investment in gold get the benefit of the rupee weakening. International gold prices are fixed by the London Bullion Market Association (LBMA) in USD. The price at which we buy and sell in India is in rupee, which is after conversion from dollar to rupee. The returns from your investment in gold is a combination of gold price movement (LBMA, USD) and weakening in rupee over the period.
The other avenue where you can avail of currency weakening is international investments in equity. There are feeder funds, fund of funds and exchange traded funds investing in equity abroad. There is also the Liberalized Remittance Scheme (LRS) which allows you to remit / invest up to $250,000 per financial year.
Over the years, our currency will hit all-time low from time-to-time. The growth of our economy is on a sound footing, and the next few decades belong to India, irrespective of currency weakening.
Source: https://www.financialexpress.com/money/your-money-dont-get-swayed-by-currency-lows-3224260/