Rupee versus dollar. Photo: iStock
The rupee, which closed at 68.88 against the dollar
last week, has depreciated 7.99 per cent over the past six months. When the rupee
depreciates, household finances get hit. Families planning a jaunt abroad, or those intending to send their children for higher studies to foreign universities, need to save more. The good news, however, is that the worst of the depreciation may be behind us, and with some nifty planning you can minimise the impact of the rupee's depreciation on your long-term financial goals.
Fund outflows and crude causing depreciation: The trade wars unleashed by Donald Trump are leading to risk-off trade globally. "The trade war, which was between the US and China only earlier, now threatens to engulf the European Union, Canada, and Mexico as well. This is causing risk aversion and leading to repatriation of money back to the US," says Indranil Pan, group economist, IDFC Bank.
The US dollar
is also strengthening because money from across the globe is moving to the US to benefit from the higher yields there. "Yields within the US have moved up, so it has become attractive to park money there," says Sameer Narang, chief economist, Bank of Baroda. Foreign institutional investors (FIIs) have withdrawn Rs 413.28 billion from the Indian debt market and Rs 40.61 billion from the equity market year-to-date.
High crude prices, too, are contributing to the pressure on the rupee.
Economists, however, believe that there is limited downside for the rupee
here onward. Crude prices are unlikely to sustain above $ 80 per barrel as shale supply would start coming in at those levels. If the trade wars dent global growth, crude prices could even correct. As for FII outflows, they are likely to abate as the gains on US investments get arbitraged away. Hence the rupee
may not fall beyond 69-70 levels. "I don't see large depreciation hereafter, though much will depend on how crude prices behave," says Narang.
Students have it toughest:
Students planning to go abroad for studies, especially to the US for the academic season starting in Fall (August and September) will find that they now need to shell out more for all types of fees: application, examination and tuition. The depreciating rupee
will also impact the cost of living abroad. Those already studying in foreign universities will also have to bear a higher outgo as many colleges take fee each semester.
There is little you can do in the short run. “The fees and even the living expenses are standard. Students will have to pay at the higher exchange rate,” says Ajay Sharma, president, Abhinav Outsourcings. Student working part-time should remit their savings now and pay off their education loans to benefit from exchange rate.
Bring down travel cost:
The falling rupee
will also hit travel budgets, depending on the country you are travelling to and how the rupee
has fared against the local currency. If the rupee
has depreciated, the significant impact will be on day-to-day expenses, which include eating out, shopping, entry fees, and so on.
One way you can save on costs is by opting for group travel, instead of customised packages or travelling on your own. “Group travel to any destination is cheaper by at least 30 per cent compared to customised individual travel. As a large operator, we buy in bulk and this enables us to bring down costs,” says Karan Anand, head–relationships, Cox & Kings.
Slight alterations to plans can help independent travellers cut costs significantly. “If the traveller feels that the overall cost is too high, he should choose countries whose local currencies have not appreciated much against the rupee.
Indonesia, Russia, and Turkey are examples,” says Sharat Dhall, chief operating officer (B2C) of travel portal Yatra.com. He adds that travellers should opt for connecting budget flights instead of direct full-fledged carriers, and use budget hotels and homestays via popular apps. “Cutting a day or two from a two-week vacation can also help bring down costs,” says Dhall.
Diversify with international funds:
A falling rupee
may not impact equity returns directly, but it does have an indirect impact. A weaker rupee
means businesses have to pay more for imports. This affects companies that rely on imported raw materials, such as oil marketing, aviation, fast moving consumer goods companies, and so on. At the same time, a weaker rupee
boosts the returns of export-oriented businesses such as information technology (IT) and pharma.
One way to benefit from the rupee's fall is to invest in pharma and IT stocks using the mutual fund route. “Opt for sector funds if you understand the risks or have an advisor who can guide you, or else, stay put in diversified equity funds as the fund managers of these funds also take bets based on such events. Don’t put more than 5 per cent of your equity portfolio in sector funds,” says Chitra Iyer, CEO, My Fianncial Advisor.
Over the past 10 years, the rupee
has depreciated at a compounded annual rate of 4.90 per cent against the dollar.
To cope with the long-term depreciation of the rupee, invest in international mutual funds, preferably those focussed on the US. Besides providing diversification, they will also help with long-term goals such as your child's higher education abroad. “These funds don’t hedge currencies and, hence, investors stand to gain from fund appreciation as well as rupee
depreciation,” says Suresh Sadagopan, founder, Ladder7 Financial Advisors. But he cautions that investors should restrict their investment in foreign assets to 20 per cent of the portfolio and stay invested for the long-term, instead of timing their exit and entry based on currency movements.