Saving for your child’s future education amidst rupee depreciation!
As the Indian market is witnessing continuous withdrawals of foreign investments, the USD/INR hit its record low of Rs.80.23 on the 14th of July.
As the experts predicted, the rupee hit 80 levels against the U.S. dollar in July 2022, causing a significant shock among investors.
Are you worried about saving for your kid’s education abroad when the rupee is falling significantly? In this article, let’s see how you can hedge over the rising USD rate to save up for a child’s higher education.
Why has the rupee depreciated?
The intrinsic value of the Indian rupee to the U.S. Dollar works on a demand-supply basis. With a higher demand for the U.S. Dollar, the value of the Indian rupee depreciates and vice-versa.
The rupee’s fall these days is mainly due to high crude oil prices, a strong dollar overseas, and foreign capital outflows.
The rupee has declined since early this year, especially after supply chain disruptions because of the Russia-Ukraine war, global economic challenges, inflation, and high crude oil prices, among other issues.
Besides, there have been heavy foreign fund outflows from the domestic markets as foreign institutional investors (FIIs) have sold shares worth Rs.2.84 lakh crores this year compared to the withdrawal of Rs. 552 crores in the initial eight months of 2021.
As money flows out of India, the rupee-dollar exchange rate gets impacted, depreciating the rupee. Such depreciation puts considerable pressure on the high import prices of crude and raw materials, paving the path for higher imported inflation and production costs besides higher retail inflation
What opportunity does this USD appreciation give you?
The U.S. Dollar Index has touched levels it hadn’t reached in 10 years. Since the beginning of this year, it has gained 8 percent in value.
The main reasons for the rise in the USD rate are an increase in the Fed rate, the Russia-Ukraine war, global sanctions on Russia, soaring commodity prices, China’s lockdowns due to covid 19, and Europe’s and Japan’s economic slowdowns.
International investment acts as a hedge against rupee depreciation, also known as currency risk. With the recent rupee fall, Indian investors should take advantage of this opportunity by investing in the U.S. market.
Your Indian stock market investments are in INR. However, when you invest overseas (in the U.S. stock markets), it is denoted in dollars.
You first convert your money into USD as per the exchange rate to invest and then back to rupee terms during redemption. Whenever the rupee depreciates against the dollar, it means that you earn an additional return on your U.S. investments.
You can see how much the USD has appreciated over the past year. In July 2021, the USD to INR rate was recorded at 74.33. On 14th July 2022, the USD to INR was at a record high of Rs. 80.23.
After this, the dollar attained a rate of Rs. 79.85 on 24th August 2022. What would this mean for your investment? Overall, the USD has seen a 7.43% increase in its value in INR terms.
Let’s understand this with an illustration.
If you invest Rs. 10000 in any fund in July 2021 when USD/INR was Rs. 74.33, the investment in Dollar terms is $134.
Let’s assume the investments have earned a net return of 0%. Even then, if you redeem it on 24th August 2022, when the USD/INR rate was at Rs. 79.85 compared to the previous rate, your investments are valued at Rs. 10742.63, giving you a gain of Rs.742.63 in a year.
Thus, a rupee depreciation results in gains for owners of assets and receivers of income in USD.
Saving for your child’s future education amidst this situation
When you plan to send your child abroad, for their higher education, as a parent, you are prepared to bear the expenses in that country’s currency.
Let’s take the U.S. in this case. When you send your kid to a renowned college or university in the U.S., you have to pay the tuition fees, living expenses, and other miscellaneous expenses in dollars.
As a typical Indian, we always convert Dollars to INR, which we should also do since the income is INR. Now imagine, when you are saving up in INR, is it possible for you to bridge the gap between the two currencies?
There would be a significant mismatch in what you’re saving vs what you would be spending in dollar terms.
But, when you invest in global markets, the U.S. market, in this case, gives you an upper hand to beat inflation and your domestic currency depreciation. If you want to spend in dollars, it is always better to invest in dollars.
Now, how is this possible?
The significant modes of investment in the U.S. market would be direct stocks, mutual funds, U.S. ETFs, Options, Forex, etc.
The most optimum modes of investment in these options would be direct stocks in the U.S. stock market and U.S. ETFs. ETFs are a basket of securities traded on the stock market.
ETFs are always a good choice for beginners and investors who do not have much time to invest and manage their investments actively.
This investment mode is less time-consuming and offers exposure to every sector and segment of the market, dependent on the investment style of the investors.
The trade deficits will continue for quite some time, and the rupee is likely to reach 82 levels against the dollar in the third quarter, as per the analysts at Nomura.
The rupee might already touch 80 levels before this month’s end since there are no positive movements from the MPC committee to tackle the soaring inflation in India or the depreciating rupee value.
Moreover, heavy FII inflow in the U.S. market has increased the dollar demand significantly, increasing the USD value.
To prepare for your child’s higher education, investing in the global markets provides a hedge over currency risk and prepares you for the expenses in that country’s currency.
With the rising USD rates, you can also see a fundamental value rise in your investment in the dollar.
Why is the rupee depreciating?
With a higher demand for the U.S. Dollar, the value of the Indian rupee depreciates and vice-versa.
How can you protect your child’s savings from currency depreciation in India?
A common method to protect your child’s savings from currency depreciation is to invest in global markets. Choose US stocks and US ETFs, diversify your portfolio, and invest directly in US dollars so that your child’s education savings grow along with the strongest currency.
Are international investments a good option?
Yes, global investments are good. International investment acts as a hedge against rupee depreciation, also known as currency risk. With the recent rupee fall, Indian investors should take advantage of this opportunity by investing in the U.S. market.