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We all know that the value of the Indian Rupee keeps falling against the US Dollar with the variation in oil prices. Many other factors, such as the economic slowdown, affect the value of the Indian Rupee. At times, we see a continuous fall in its value on consecutive days, while we see it arise only rarely.
Rupee devaluation results in imports becoming dearer. Inflation is affected as well. But it is good for exports! For consumers, travel and education become more expensive. Therefore, here are four impacts of the falling rupee on your investments.
Mutual fund investors who have invested in foreign stocks will have a big time when the Indian Rupee depreciates. The returns from foreign funds will have two components—the performance of the foreign stock and the currency movement.
Depreciation may not impact your long-term portfolio if it is well-diversified. On the other hand, there may be short-term price fluctuations in individual stocks if they are related to import/export business or if they finance such businesses.
Appreciation in the US Dollar will have an inverse impact on the price of the precious metal, gold. You can invest in gold when the prices are low and make profits when the prices go up.
Since gold accounts for deficits, i.e. gold imports exceeds the value of its exports, the government may take action to reduce its import so it can bring balance in the price.
The decreasing Indian Rupee increases the bond yields, leading to an increase in the interest rates. The rising interest rates can bring in a lot more foreign institutional investments to the country.
However, such a situation is not favourable for long-term debt funds as their net asset value (NAV) and returns fall. Further, it can also affect the government bond schemes associated with National Pension Scheme (NPS).
When the value of the Indian Rupee becomes volatile, the Reserve Bank of India (RBI) tweaks the repo rate such that inflation is driven up. By driving interest rates up, RBI tries to lower the demand for goods that puts pressure on prices. This will reduce the demand and holding power of builders. This will negatively impact the real estate industry.
This discourages local buyers to invest in real estate as the buyers cannot afford to pay the EMIs as they will be hit by the depreciated value of the currency. The loans will get expensive with the increase in repo rates. However, NRIs can find an opportunity to make the most of their money during such times.