How to Make Money from the Dollar’s Rise 🤑

All the news around the USD appreciating and INR depreciating almost always has a negative undertone. And rightly so, there’s much hurt for an importing nation like India. And if are an Indian student studying abroad or simply visiting for leisure, the conversion rate is nothing short of dismal.

But there are ways to take advantage of this, and gain from the USD appreciation. Here’s how you can profit from this losing hand.

But before that

In the last ten years, the rupee has depreciated by approximately 45% against the US dollar. Over this year so far, the depreciation has been 7%, much steeper. But the point is, the overall trend is for the rupee to depreciate. There are theoretical reasons for that which we won’t touch — read more on interest rate parity.

Basically, over the last 10 years, you would have made some extra returns just because of currency depreciation if you were to invest in US dollars, and get that money back to Indian Rupees at the end of the investment horizon.

In short; sitting in India and investing in the US = natural currency advantage. This advantage naturally got exacerbated this year. So how can you get exposure to those dollars?

1. Cash is king! If you’re one of those people who converts currency to dollars before international vacations, and then lets the spare money accumulate, you’ve done well. A dollar bought ten years ago by paying Rs. 50 can now be sold at Rs. 80! If you aren’t one of those, you can simply get some of your rupees converted to dollars and stash it up. But there are limits to such hoarding — regulatory and practical, so don’t go overboard!
2. US ETFs Several Indian AMCs have started Fund of Funds and ETFs that replicate the performance of an index (like Nasdaq 100) or a strategy (like FAANG). These instruments can be a great way of getting exposure. After all, the US market has been one of the best performing in the world over the last decade.
3. Stocks of Indian exporters When the rupee weakens, businesses in export-dependent industries like information technology see an increase in revenue and margins. When US$ revenue is converted to INR, there’s a higher revenue booking. At the same time, for most of these companies, costs are in INR, which remain constant; thereby increasing margins too. Other than IT, several manufacturing companies too depend on the US market for most of their sales. Component manufacturers and chemical producers with a sizeable US exposure can also be invested in.
4. A US broking account (the hard way) You can open an account with a US-based broker, which is possible under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI). This allows investments of up to US$ 250,000 per annum. You can then directly invest in US stocks or bonds or ETFs. However, this comes with a slew of tax implications and filing requirements. There are also platforms like IndMoney and Vested which facilitate these transactions. However, one must consider the costs associated with such investments. There are a lot of hidden charges which may make investing rather expensive.

Disclaimer!

The past depreciation of the Indian Rupee against the US dollar had been courtesy the difference in interest rates. Investing in the US markets or through Indian companies with exposure to the US can be relatively safer in normal macroeconomic conditions, and where INR depreciation takes place on a normal course.

However, times are different now. The sharp INR depreciation and US$ appreciation can be attributed to high inflation in the US, an increase in rates by the Fed, and a possibility of the US dipping into recession.

Although currency depreciation can make money at such times, the underlying instrument has a very high risk of depreciating in value — that too, to an extent where gains from the currency depreciation can look meaningless.