How Indian Investors Can Profit Despite a Weakening Rupee

The Indian Rupee (INR) has depreciated by approximately 3.5% against the US Dollar over the past 6 months. While this may raise concerns about inflation and higher import costs, it presents an advantage for Indian investors holding US-focused mutual funds and stocks.

When the rupee weakens, the value of US-denominated assets rises in rupee terms. This currency-driven boost can significantly impact investment returns, even when the US stock market remains stable. The extra ₹5,000 gain happens because the US Dollar appreciated against the Rupee, increasing the value of the US stock investment when converted back to INR.

How Currency Movements Enhance Returns

To understand this better, consider an investor who placed ₹1 lakh each in Indian stock and a US stock a year ago. Suppose both investments generated a 20% return:

• The Indian stock would now be worth ₹1.2 lakh.
• The US stock would also have grown by 20% in dollar terms. However, due to the rupee’s depreciation, its value in rupees would be higher—approximately ₹1.25 lakh.

This additional ₹5,000 gain is purely due to the dollar’s appreciation, illustrating how currency movements can amplify returns for Indian investors.

Historical Impact of Rupee Depreciation on US Investments

Over the past year, currency fluctuations have contributed an additional 4%-5% to returns on US-denominated assets. In the last three years, the cumulative effect could be as high as 10-15%, further enhancing the overall performance of US-focused investments.

US mutual funds and ETFs that hold dollar-denominated assets benefit significantly when the rupee weakens. Even if the US stock market remains stagnant, Indian investors can still earn positive returns due to currency appreciation.

Beyond Currency Fluctuations: Focus on Growth Sectors

While rupee depreciation provides a short-term boost, long-term investment returns are primarily driven by economic growth, industry trends, and company performance.

Should Investors Hedge Against Currency Fluctuations?

With the rupee’s volatility, some investors may wonder whether they should hedge against depreciation or use it to their advantage.

A diversified portfolio with exposure to both domestic and international markets offers a natural hedge. While some instruments, such as currency-hedged funds, can neutralise exchange rate risks, long-term investors may find that US-based investments inherently protect against rupee weakness.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. 

Mutual Fund investments in the securities market are subject to market risks, read all the related documents carefully before investing.