Kristal Insights5 Mins Read
How to Hedge Smartly When the Rupee is Falling
Updated: 13th April, 2020
Do you know what to do when the rupee falls?
A stock market crash has an effect on currency values causing a depreciation or fall in the value of the rupee. The recent COVID-19 pandemic has seen the rupee fall against the dollar. On April 9th, 2020, the rupee fell to a new low of 76.54 against the dollar as reported. At the time of writing this, it is currently trading at 76.36.
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.
What is causing the rupee to fall?
The primary driver of the fall in rupee value to fresh record low levels is the rapid spread of the coronavirus. There are also external factors such as dollar index, crude oil prices, and emerging market currencies. All these can have an effect on our national currency. Before the pandemic, there were heavy outflows from local stocks and equities. The depreciation in the rupee was capped by falling crude oil prices.
Now, usually, a weak rupee spells good news for exporters. This is because they get more money for their exports due to the conversion rates. Case in point: information technology and pharma companies. These sectors usually enjoy a falling rupee as the sources of their revenue as based abroad.
Right now, the global scenario is still fragile. No one can predict when the pandemic will end. The RBI in India has been trying its best to cap the liquidity in the forex market. We will need heavier inflows to prevent the rupee from falling further.
But this is also a good opportunity for importers to hedge against the rupee and find protection. Currency traders might also gain from this scenario if they use it wisely.
How to hedge when the rupee falls?
One way to hedge when the rupee falls is by investing in U.S. markets. An investment in U.S. companies increases in value when USD appreciates against the INR as a funds’ NAV increases. A global developed market portfolio gives one exposure to 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. But be sure to use these bonds carefully! Pick them only after doing a detailed qualitative and quantitative analysis. Before investing, consider tax implications and stay invested for the long term.
Overweighting India’s pharma and IT sector in one’s portfolio is a good idea too. Exporters benefit from a weak rupee as they get more value while converting dollar earnings into Indian currency. This increases their net margins. The pharma, healthcare, and IT sector look poised to emerge out of this pandemic in good health. Investing in this sector should be a good hedge for the long term.
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