Rupee falling against the dollar, what should you do?

One SMS doing rounds about the fall in Rupee/Dollar exchange rate caught my attention. It read: “Rupee will soon be a senior citizen”.
The rate at which the Rupee value has fallen with respect to the global currencies has got the Ministry of Finance and the Reserve Bank of India worried. The falling Rupee makes the imports become costlier and the current account deficit bigger.

You have all read this stuff from various news articles or commentaries from various fund companies and research agencies. But, all these sounds Greek and Latin. The question is: What does it mean to your personal finances?

Well, let us look at the four essentials of the personal finances: assets, liabilities, income and expenses and check the impact of the fall in Rupee on each of these.

If someone is earning income only in Indian Rupees, there is no impact on the change in exchange rate on the earnings. However, if the earning is in foreign currency – on account of investment income or professional income – the Rupee equivalent of that income increases.

Anyone having any foreign exchange loan or a liability should worry a lot, as the future payments would be costlier. However, your loans taken in Indian Rupees would have no impact. Even if someone has taken a loan from a bank in India for funding education abroad, the liability remains the same in Rupees. While this was about a loan, a similar impact would be felt on foreign exchange expenses, too. The next foreign vacation just got costlier. Similarly, if someone is sending money to a child studying abroad, one needs to shell out more Rupees for the same Dollars. Many other regular consumption items may also get impacted as India imports lots of commodities. Primary among the commodities imported are petroleum oil and gold. This will have an impact on household budget of every Indian. The ability to save may reduce.

Now comes another question regarding expenses. Are you planning any expenses in foreign currency? Considering the number of students going abroad for higher study, many Indian parents must be planning foreign education for their kids. This means whatever you have planned to save and invest in India may need to be reviewed. If the Rupee remains at such levels, there could be a deficit in the total amount required to fund that foreign education.

Then finally comes the question of the assets. All the investments made in India are not affected, as in the case of income, expenses and liabilities. Similarly, if one has investments abroad, the value (in Rupees) immediately got a boost. If anyone had invested in one of the international mutual funds last year, one earned around 9% to 10% extra only because of depreciation in the value of the Rupee.

What is the lesson from this episode? Well, if you have expenses in a foreign currency, it is better to start building the exposure in those respective currency assets right now. Now that Indians can invest in international markets through the mutual fund route, taking such exposures is now quite easy and convenient. Someone may ask, “My child is very young and I have no idea where she will study. In which currency should I invest?” Well, the answer is quite simple. If the child is, say 2 to 3 years old, you don’t even know what faculty the child will study in. That does not mean that you do not plan. Similarly, if you have no idea if your child will study in India or abroad (and if abroad, in which country), it is better to invest in a diversified basket across various currencies. Build your portfolio systematically through staggered investments in international funds so that when the need arises, you do not run short of money.

Happy investing.

- Amit Trivedi

The author runs Karmayog Knowledge Academy. Views expressed here are his personal views. He can be reached at amit@karmayog-knowledge.com.