A Weak Rupee Requires A Strong Response
The rupee now stands at 72 against the US Dollar. This is an unprecedented low. So far, neither the RBI nor the Government has aggressively stepped in. Is there an investment opportunity for you?
When the rupee weakens, the markets react. The yield on the 10 Year Government Security has already risen more than 20 basis points (0.2%) since the middle of August. Inflation is closely linked to the value of the rupee. As the rupee falls, inflation climbs. When inflation shoots up, interest rates are poised to rise. A higher interest rate scenario means that you could potentially earn more from fixed-income investments. The sensible response in this situation would be to lock-in at an attractive rate. If the rupee falls further, it should be treated as an opportunity.
Remember that you can do better than a fixed deposit. Wouldn’t you rather pay tax on the money when you actually decide to use it rather than continuously on periodically earned interest? Doesn’t an investment option that protects your capital from inflation sound more appealing? Debt mutual funds offer higher returns, are more tax efficient and indexation allows you to beat inflation.
Directional calls on interest rates should be avoided. The RBI’s neutral stance, as well as its wait and watch approach, provide no indications on how interest rates could move. Government or RBI intervention could quickly reverse the trend and shut down this opportunity. The rupee could gain muster if NRI deposits offer more attractive returns. Resident Indians would stand to lose this opportunity as the rupee strengthens.
At the same time, the rise of equity indices is disconcerting – risks are plain and sustainability is in question. For equity investors, the investment horizon should be at least between three to five years. Investments should be diversified or allocated to well-established, high-quality companies. There is no quick money to be made in the market. Risks are aplenty and rewards few and far between. A sensible strategy will prepare you to face headwinds.
You would not be doing your wealth justice if you remained a spectator. A weak rupee requires a strong response. The window of opportunity is narrow and your timely response could serve you well.
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