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Forex frisson

A depreciating rupee will hurt your household budget. Adhil Shetty helps you brace for it
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Representational image.
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Adhil Shetty   |   Published 30.05.22, 03:23 AM

The rupee is on the slide. In May the exchange rates are nudging 78 rupees to the American dollar. Some estimates suggest it may fall a little more this year.

This is happening on the back of spiking import costs. Crude oil costs have been the highest since 2011. India being a net oil importer has had to spend more and more on dollar imports. The more this happens, the more the rupee gets devalued. It has consequences for every household. Let’s look at what you could do to safeguard your finances. 

Students will be impacted

Indians students abroad will have to face the double whammy of rupee depreciation as well as rising interest rates.

A depreciating rupee will impact both new and existing students. Their tuition and living costs will go up. Families will have to budget for these costs or even borrow more. The rising rates will make the loan bigger.

The depreciating rupee will need you to pay more rupees for the same dollars. The weakening rupee impacts your finances, but forex fluctuation is a fact of life.

My own experience studying abroad is that dollar-denominated loans are tough to pay with a rupee income. Therefore, as you start earning, pay more than the minimum due. Don’t settle for paying just your EMI.

Since forex is a constant problem to reckon with, take a proactive approach to your loan payment. Close it off before its time, else your borrowing costs could keep rising.

Higher foreign returns

Many Indian investors buy stocks and ETFs on foreign exchanges. If you have your existing investments in US stocks, you will benefit from the fall in the Indian rupee’s value.

For instance, if you have 100 shares of company ‘A’ bought at $10 when the rupee-dollar exchange rate was 70. This means you invested Rs 700 in each share, and your total investment cost in the Indian rupee term is Rs 70,000 ($1000).

Let’s assume the stock price is now $15. Your total value in the US dollar term is $1500. In the rupee term, assuming that the exchange rate is still at 70, your total value of the investment would be Rs 1,05,000.

However, since the exchange rate currently is at 77, you will get Rs 1,15,500 — an extra Rs 10,500.

Do note these are nominal figures. Adjusted for inflation, your real returns may be lower. Similarly, the value of the remittances which Indians get from abroad will rise in nominal rupee terms.

Foreign travel is now costlier

With foreign exchange becoming costlier, your plans to travel abroad this summer would become costlier. You may have to stretch your travel budget.

For instance, if you had the plan to spend $5,000 when the Indian rupee was at 75 against the dollar, you had to pay Rs 3.75 lakh. But now, with the rupee falling to 77, you will have to spend Rs 10,000 more to have the same amount of dollars with you on your trip.

One of the ways you can shield yourself against forex volatility is by carrying currency notes of the country you’re travelling to.

In-hand currency would retain its value whereas transactions done through credit or debit card would be converted to rupees according to the latest forex rates.

Impact on household budget

Most importantly, a falling rupee leads to an increase in your domestic expenses. As the costs of critical imports such as oil rise, the costs of production of goods and services increase. This pushes up retail prices and thus your household expenses.

As inflation goes up, borrowing also becomes costlier, and your home loan interest rate goes up.

The Reserve Bank of India had some years back stated that a 5 per cent depreciation in the rupee pushes up inflation by 10-15 basis points.

So a falling rupee increases your expenses in multiple ways. This requires a multi-pronged response from you.

At a time like this, it becomes important to spend conservatively and to be frugal.

With your loans, it’s also necessary to pre-pay regularly to prevent the interest from burgeoning out of control. 

Lower real returns

With the rupee in decline and interest rates on the rise, it may seem convenient that your deposit interest rates are also rising.

However, you need to assess real returns, i.e., returns after inflation and taxation. For example, if your deposit returns 5 per cent while the inflation rate is 7 per cent, you are really earning -2 per cent returns.

After taxation, your real returns could be even lower. It thus becomes necessary to diversity investments using various asset classes such as equity or gold that may be able to give you better net returns.

The writer is CEO, BankBazaar.com



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