When you buy a share of Reliance Industries in India, you worry about only one thing: Will the stock price go up?
When you buy a share of Apple Inc. in the USA, you must worry about two things: Will the stock price go up? AND Will the Dollar go up or down against the Rupee?
Investing internationally is always a dual bet. You are taking exposure to an Asset Class (like US Tech stocks) and a Currency (the US Dollar). This introduces "Currency Risk" (or Forex Risk). However, for investors in emerging markets like India, this "risk" has historically been a massive benefit.
1. The Total Return Equation
To understand global returns, you must understand the math. Your final return in Rupees depends on two moving parts.
The Global Math
Scenario: You bought Apple stock. It went up 10% in New York. Simultaneously, the Dollar became stronger by 5% against the Rupee.
The Reverse Scenario: If the stock goes up 10%, but the Dollar falls by 10% against the Rupee, your net return in India is 0%. This is why currency movements are critical.
2. Why does the Rupee Depreciate? (Inflation Differential)
Historically, the Indian Rupee (INR) has depreciated against the US Dollar (USD) by an average of 3% to 5% per year over long periods. Why?
The primary driver is the Inflation Differential theory.
• Inflation in India: ~6%
• Inflation in USA: ~2% (Historical average)
• Difference: ~4%
To maintain "Purchasing Power Parity" (PPP), the currency of the high-inflation country (India) must depreciate against the low-inflation country (USA) to keep trade balanced. Since India imports more than it exports (Trade Deficit), there is a constant natural pressure on the Rupee to fall.
The Rupee has moved from ~₹45 to ~₹83 in two decades. This depreciation adds to your returns.
3. The Hedge: Your Protection Plan
For an Indian investor, investing in US assets acts as a natural hedge against domestic inflation.
Imagine you are saving for your child's education in the US. The fees are in Dollars.
• If you save in Rupees (Indian FDs), and the Rupee crashes to ₹100/$, your savings lose massive value.
• If you save in US Stocks, and the Rupee crashes, your US investment value in Rupees skyrockets, offsetting the higher cost of education.
4. Hedged vs. Unhedged Funds
When you buy international Mutual Funds or ETFs, you will sometimes see the term "Hedged." What does this mean?
- You get Stock Return + Currency Return.
- If USD rises, you profit more.
- Standard for Indians: Since INR tends to fall long-term, unhedged funds give higher total returns.
- The manager uses derivatives to cancel out currency moves.
- You get ONLY Stock Return.
- Costly: Hedging costs money (approx 4-5% annualized in India), which eats into returns.
Exception: If you are a US investor investing in India, you might want a Hedged fund because you fear the Rupee will fall and eat your profits.
5. The "Carry Trade" Concept (Advanced)
Why do global investors pour money into India despite the currency risk? Because of the Interest Rate Differential.
If US interest rates are 5% and Indian rates are 7%, money doesn't automatically flow to India. The foreign investor knows the Rupee might fall by 4%.
• Expected Return = 7% Interest - 4% Currency Loss = 3%.
• Since 3% < 5% (US Rate), money might actually leave India.
This is why the Reserve Bank of India (RBI) keeps interest rates high—to compensate foreign investors for the risk of Rupee depreciation.
Summary of Module 4
Currency is not just a risk; for Indian investors, it is a strategic asset. By holding assets in US Dollars or Euros, you protect your purchasing power from the structural depreciation of the Rupee. You effectively "globalize" your wealth.
But currency is just one macroeconomic factor. What about Interest Rates, Inflation, and the actions of Central Banks? In the next module, we will discuss the most powerful entity in the financial world: Macroeconomics & The Federal Reserve.