Dollar vs Rupee: How Currency Fluctuations Impact On Your Investment Portfolio

Currency fluctuations are a pivotal factor in the import and export business. Economies with a surplus of goods can export them to other countries, while those needing specific products must import them. However, the primary challenge in this trade cycle is navigating currency fluctuations. These fluctuations directly impact the revenue and profitability of companies engaged in international trade, influencing their share prices and, consequently, your investment portfolio.

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The exchange rate between the Indian rupee and the US dollar plays a crucial role in this dynamic, determining the financial outcomes for businesses and investors alike.

How Rupee Appreciation Impacts Shares of Indian Companies

• Information Technology: Indian IT firms generate a substantial portion of their revenue from exporting software services. Therefore, rupee appreciation negatively affects their profitability and share prices.
• Pharmaceuticals: Indian pharmaceutical companies rely heavily on exporting products to markets like the USA and Europe. Rupee appreciation reduces their profitability, leading to a decline in their share prices.
• Automobile and Engineering: Companies in the auto and engineering sectors also export a significant portion of their output. Rupee appreciation negatively impacts these sectors’ stocks.
• Oil and Gas: Cheaper imports benefit companies in the oil and gas sector by lowering input costs and increasing profit margins, resulting in higher share prices.
• FMCG: For fast-moving consumer goods companies, rupee appreciation makes imported raw materials cheaper, lowering costs and improving profit margins, leading to a rise in share prices.

How Rupee Depreciation Impacts Shares of Indian Companies

• Information Technology: With revenues in dollars, rupee depreciation boosts the profitability of IT companies, positively impacting their stock prices.
• Pharmaceuticals: The competitiveness of Indian drugs in foreign markets increases, boosting exports and profitability.
• Automobile and Engineering: Depreciation of the rupee makes exports more lucrative, enhancing profitability and raising stock prices over the long term.
• Oil and Gas: Increased import bills for crude oil and natural gas due to rupee depreciation squeeze profits, resulting in declining share prices.
• FMCG: Imported raw materials become more expensive, escalating costs for FMCG companies and hitting profit margins, which drags share prices down.

Managing Currency Volatility in Your Portfolio

To build long-term wealth, investors need to create a diversified portfolio. Balancing between exporters and importers helps manage currency risk.

When choosing stocks, focus on companies with solid businesses, global operations, and national currency hedges.

Equity-oriented funds offer diversified portfolios that moderate currency risk. Adding international mutual funds brings geographical diversification beyond Indian currency risk. Exchange-traded funds (ETFs) also provide exposure to indices less impacted by currency fluctuations.

Should Investors Worry About Currency Fluctuations?

Currency fluctuations are normal and should not overly concern investors. Proper research and investment in large-cap companies with valuable products and growth opportunities can mitigate the impact of short-term currency volatility. Creating a diversified portfolio and holding investments long-term can help hedge risks.

Conclusion

Currency fluctuations are common and can impact an investor’s portfolio. However, diversification helps minimise risk. While rupee appreciation negatively affects export-focused sectors, those reliant on imports benefit from reduced input costs.

-The author is the CEO of Bigul. Views expressed are personal.