Hedging Against Rupee I International Investments for Indians

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How to Hedge Smartly When the Rupee is Falling

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The INR hit a new low of 72.67 against the USD on 9th September. As of today (Friday, September 14th) the Rupee stands at 71.74 against the USD. One year back it was trading in the range of 62-66. The INR has plummeted 13.6% this year from 63.94 at the start of the year. This has made the currency one of Asia’s worst performer this year. The INR seems to be unstoppable as it has been hitting new record lows almost every day for last couple of weeks.

As we know, INR has continuously fallen against the USD from 70.17 on August 27 and is expected to fall even more till 75.

In the long run, INR depreciation against the USD depending on the interest rate is differential. In the short run, supply and demand will determine the exchange rate.

Why is the Rupee Falling?

The fall in the INR is mainly due to higher crude oil prices, widening trade deficit, concerns over the trade war. India’s current account deficit widened to $15.8 billion in Q1FY19, the most in five years. The CAD widened to 2.4% of gross domestic product (GDP) in Q2FY19, from 1.9% of GDP in the Q4FY18. FY2019 CAD is expected to reach $75 billion (2.8% of GDP) against $48.7 billion in FY2018 (1.9% of GDP) mainly due to higher non-oil imports and flat non-oil exports.

Crude is another important factor as after stabilisation from $80 a barrel levels to around $72 in a two-month period, oil prices have started moving up again towards $80. Crude oil prices are currently $77 per barrel as US drilling for new production stalled and ahead of supply tightening on new US sanctions against Iran’s crude exports from November. Crude oil prices have always been a risk for India as it imports around 80% of its oil needs. According to certain statistics, one dollar increase in oil prices can increase the import bill by $1.6 billion. The rise in crude oil price has a big impact on the CAD. A $10 increase in crude oil price can worsen the CAD by $10 billion or 0.4% of GDP. The dependency on crude oil imports rose from 77.3% in FY2014 to 83.7% in FY2018.

Escalating trade war concerns between US and China is another reason why the INR is depreciating. Trump announced that he is ready to place tariffs on $267 billion worth of Chinese imports in addition to the $200 billion of goods already facing tariffs. After imposing import tariffs on Chinese goods, Trump now has an eye on Japanese goods for tariffs.

Moreover, foreign institutional investors have been continuously selling Indian debt and have sold debt worth $4 billion this year, the most since the global financial crisis of 2008. Converting this amount from rupee to dollar, increase the demand for the dollar and pulls the value of rupee against the dollar. Rising US interest rates will lead to foreign investors leaving the Indian debt market and if this continues dollar can touch a value of 75 against the rupee.

Hedging Against a Depreciating Rupee

A way to hedge against the falling rupee is by investing in US markets. An investment in US companies increases in value when USD appreciates against the INR as the funds’ NAV increases. A global developed market portfolio gives one an exposure towards a different geography and sectors. Besides diversification, they also give support during a period of emerging markets crisis. Adding dollar-denominated bonds in the portfolio is another way to hedge against the depreciating rupee. These companies should be carefully chosen after doing a detailed qualitative and quantitative analysis. However, before investing one should consider tax implications and stay invested for the long term.

Overweighting India’s pharma and IT sector in one’s portfolio is another way. Exporters benefit from a weak rupee as they get more rupees while converting dollar earnings into Indian currency, thereby increasing their net margins.

At Kristal.AI we have different Kristals, that invest across the globe from Asia to America. One can gain exposure to different geographies, and sectors through equities, ETFs and derivatives, in a completely legal process. The strategies are rebalanced on a quarterly basis with the rebalancing mechanism being determined by an algorithm that considers the overall performance of the strategy so far.

We would definitely like to learn about your thoughts on the same. Let us know your queries or suggestions, in the comments section below or write to us at hello@kristal.ai. If you would like to explore how you can grow your wealth based on specific financial goals, sign up at www.kristal.ai, and we would be happy to help you.


The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.