Why NRIs Benefit When the Rupee Falls: Currency Impact on Overseas Investments

Understanding Currency Exchange and Its Impact on NRI Investments

Currency exchange rates fluctuate constantly due to a variety of factors including economic conditions, interest rates, geopolitical events, and market sentiment. For NRIs, these fluctuations can significantly impact the value of their investments when converting foreign currency holdings back to Indian Rupees.

Consider an NRI living in the USA who has invested USD 50,000 in a US-based mutual fund or stock portfolio. At the time of investment, assume the exchange rate is 1 USD = ₹85. This means the initial investment is equivalent to ₹42,50,000.

Now, suppose after 5 years, the Indian Rupee weakens against the US Dollar, moving from ₹85 to ₹90 per USD. Even if the investment’s value in USD remains the same, the amount in INR terms increases due to the exchange rate change alone.

Currency Depreciation as a Source of Gains

Let’s quantify this benefit:

The rupee depreciation from 85 to 90 adds a gain of ₹2,50,000 or approximately 5.88% purely from currency movement, without any growth in the underlying investment.

Combining Currency Movement with Investment Growth

Currency depreciation is just one piece of the puzzle. The real power comes from combining this with the growth of the investment itself. Suppose the USD investment grows at a modest 5% per annum compounded annually over 5 years.

The future value of the investment in USD would be:

FV = PV × (1 + r)ⁿ = 50,000 × (1.05)⁵ = 50,000 × 1.27628 = 63,814 USD

Now, converting this back to INR at the depreciated rate of ₹90 per USD:

Value in INR = 63,814 × 90 = ₹57,43,260

Compared to the original ₹42,50,000 investment, this is a gain of ₹14,93,260 or approximately 35.14% over 5 years.

Breaking Down the Total Return

To better understand the sources of this 35.14% gain, let’s separate the components:

• Investment Growth in USD: 27.63% (from 50,000 to 63,814 USD)
• Currency Depreciation Impact: 5.88% (from ₹85 to ₹90 per USD)
• Total Combined Gain: 35.14%

This example clearly illustrates how NRIs can benefit from a weakening rupee, as the depreciation amplifies their investment returns when converted back to INR.

Why Does the Rupee Depreciate?

Understanding why the rupee depreciates is crucial to grasping the risks and opportunities for NRIs. Currency depreciation occurs when the demand for foreign currency (like the USD) rises relative to the rupee, or when India’s economic fundamentals weaken compared to other countries.

Some common factors influencing rupee depreciation include:

• Trade Deficits: India imports more than it exports, leading to higher demand for foreign currency.
• Capital Outflows: When investors sell Indian assets and move money abroad, it increases demand for foreign currency.
• Inflation Differentials: Higher inflation in India relative to the US can weaken the rupee.
• Interest Rate Differentials: If US interest rates rise faster than Indian rates, capital may flow out of India.
• Global Economic Factors: Geopolitical tensions or global crises can impact currency markets.

While depreciation can benefit NRIs holding foreign currency assets, it also poses risks if the rupee suddenly strengthens or if investments in foreign currency lose value.

Real-World Example: NRI Investment in US Stocks

Let’s consider an NRI who invested in a popular US tech stock, say Apple Inc., in 2018. Assume the stock price was $170, and the exchange rate was ₹68 per USD back then.

The NRI invested $50,000, which was ₹34,00,000 at that time.

By 2023, Apple’s stock price rose to approximately $175 (a modest 2.9% increase over 5 years), but the rupee depreciated to ₹82 per USD.

The investment value in USD:

$50,000 × (175 / 170) = $51,470

Converted back to INR:

51,470 × 82 = ₹42,18,540

Compared to the original ₹34,00,000, this is a gain of ₹8,18,540 or 24.07%, mostly driven by currency depreciation since the stock price growth was minimal.

This example highlights how currency movements can sometimes overshadow the underlying investment growth for NRIs.

Risks and Considerations for NRIs Investing Abroad

While a weakening rupee can boost returns when converting foreign investments back to INR, NRIs must be aware of the associated risks:

• Currency Volatility: Exchange rates can fluctuate unpredictably, sometimes eroding gains or causing losses.
• Investment Risk: Overseas investments carry market risks, regulatory risks, and geopolitical risks.
• Tax Implications: Taxation on foreign income and capital gains can be complex and varies by country and treaty.
• Repatriation Limits: Some countries impose restrictions on moving money back to India.
• Hedging Costs: Currency hedging to reduce risk can add costs and reduce returns.

NRIs should carefully consider these factors and ideally consult financial advisors specialized in cross-border investments.

How NRIs Can Strategically Benefit from Currency Movements

Savvy NRIs can adopt strategies to harness currency fluctuations to their advantage:

• Diversify Currency Exposure: Hold investments in multiple currencies to reduce dependency on a single currency’s movement.
• Invest in USD-Denominated Assets: The US Dollar is a global reserve currency and often strengthens against emerging market currencies like the INR.
• Use Currency Forward Contracts: Lock in exchange rates for future transactions to mitigate risk.
• Time Repatriation Wisely: Monitor currency trends to decide when to convert foreign currency holdings back to INR.
• Leverage Tax Treaties: Optimize tax efficiency by understanding double taxation avoidance agreements (DTAA).

Visualizing the Impact: Investment Growth vs Currency Movement

To illustrate the combined effect of investment growth and currency depreciation on NRI wealth, consider the following graph plotting the value of a $50,000 investment over 5 years under different scenarios.

Graph: Value of $50,000 investment over 5 years in INR under different scenarios (₹L = Lakhs)

How to Calculate Your Own Returns with Currency Impact

Calculating the total return on overseas investments including currency effects can be complex. However, it involves two main steps:

1. Calculate Investment Growth in Foreign Currency: Use the compound interest formula:
   FV = PV × (1 + r)n
   where PV = principal investment, r = annual return rate, n = number of years.
2. Convert Future Value to INR: Multiply the future foreign currency amount by the current exchange rate:
   Value in INR = FV × Current Exchange Rate

This approach helps NRIs understand the combined effect of investment performance and currency movement on their wealth.

For convenience, use the LoanVsFD App which includes calculators to factor in currency fluctuations and investment growth for smarter financial decisions.

Summary: Why a Falling Rupee Can Be a Blessing for NRIs

• Currency depreciation increases the INR value of foreign currency holdings.
• Combining currency gains with investment growth amplifies total returns.
• NRIs can strategically benefit by investing in USD or other strong currencies.
• Awareness of currency risk and tax implications is essential.
• Using calculators and financial tools helps make data-driven decisions.

Final Thoughts: Balancing Opportunities and Risks

While the weakening rupee offers an attractive tailwind to NRIs’ overseas investments, it is important to remember that currency markets are volatile and unpredictable. Gains from currency depreciation can quickly reverse if the rupee strengthens. Therefore, NRIs should not rely solely on currency movements but focus on sound investment fundamentals, diversification, and risk management.

The combination of investment growth and currency effects can be a powerful wealth-building tool, but it requires careful planning, monitoring, and sometimes professional advice. By understanding these dynamics, NRIs can make informed decisions that maximize their financial potential while minimizing risks.

Call to Action: Use Tools to Make Smarter Decisions

Curious about how your overseas investments might perform considering currency fluctuations? Calculate the impact using the LoanVsFD App now. Our calculators are designed to help you visualize and quantify the effects of investment growth and currency changes, empowering you to make smarter financial decisions.

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