The depreciation of the rupee adds to the depreciation problems of your financial investments
Growing fears of economic damage from the COVID-19 pandemic have increased the purchase of the US currency, strengthening its value and in turn increasing pressure on the Indian rupee.
This week, the national currency depreciated by 124 paise. It is down more than 6% year-to-date and hit a new all-time low of 76.40 / dollar in March.
The Indian rupee closed at 76.13 against the US dollar on Friday, amid strong selling of domestic stocks.
As the Reserve Bank of India (RBI) has taken steps to prevent a sharp drop, the unprecedented coronavirus crisis will continue to increase pressure on the rupee until the pandemic subsides and the economy is starting to recover.
As an investor, you may be concerned about the performance of your investments which have already been affected by the dramatic losses in the stock markets. Interest rates on small savings plans like the PPF have also recently been reduced by the government.
High level bond yields
The weakness of the rupee keeps bond yields higher. On April 3, the first trading day on the bond market since the announcement of the borrowing schedule, the 10-year benchmark yield climbed to 6.32% from 6.14% on Tuesday, to close at 6.30% . The bond markets were closed on April 1 and 2.
This week, bond market yields rose as bond traders feared an increase in government borrowing to fund stimulus packages and other spending due to the spread of the coronavirus pandemic.
Bond yields and their prices are inversely related, leading to lower prices for government bonds on the first trading day of the new fiscal year.
The rise in yields is not very reassuring for both lenders and companies, which would like to offload these government securities to meet capital needs. It will also make corporate borrowing more expensive, hurting their profits and devaluing your equity investments and dividend potential. It will also affect the performance of government bond schemes in the National Pension System (NPS).
If you had saved up for a vacation or study abroad, the expected costs will have increased significantly from what you last planned.
For example, if you were planning to make a reservation at 4000 USD when the rupee was valued at 70 / dollar, then the package price may not have changed by 4000 USD yet, your reservation will cost you Rs 6 extra per dollar, which will be Rs 24,000 more.
How to protect your savings from depreciation?
It is known that the Indian rupee has depreciated by 3% on average each year. The current pandemic crisis across the world has only added to the pressure.
The means to limit your losses will depend on your financial goal.
For example, if you are saving for your child’s education in the United States, you may want to consider investing in U.S. stocks through a variety of mutual fund options that allow you to invest in US markets. Any gains made will benefit from the strength of the US dollar.
Likewise, if your financial goal is a vacation in Europe or any other project on the continent, you may want to follow the movement of the Euro or the British Pound against the Rupee in deciding on an investment strategy.
As for your investments in Indian markets, you can look at the sector impact of the depreciation of the rupee. For those who derive most of their profits from exporting their products, the strength of the dollar against the national currency will pay off. For example, the IT or pharmaceutical sector.
On the other hand, companies in sectors with high capital intensity, with higher dollar debts, foreign currency loans and those that import massive amounts of raw materials, will be penalized by the fall of the rupee. For example, Indian airlines and WTO.
A further decline in the rupee is likely as oil prices have started to recover and India will most likely exceed its budget deficit target given the uncertainty of the coronavirus pandemic, which will not only squeeze the country’s tax revenues. government, but will also increase borrowing to finance aid during the crisis.
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Article first published: Saturday April 4th, 2020, 1:21 PM [IST]