Introduction
If you are a non-resident Indian (NRI) seeking to invest in your home country, India, you must learn about exchange rate risks. The world of foreign exchange is dynamic. Any movement affects the value of your financial investments.
Currency prices shift due to various factors. Investors must recognise these factors and the impact of currency exchange rates. The knowledge helps to manage risks effectively and achieve maximum returns. But first, you must understand what a currency exchange rate is.
What is a currency exchange rate?
An exchange rate is the rate at which you can buy or sell a currency in exchange for another one. It offers an insight into a nation’s economic health. Many complex factors influence a currency’s exchange rate, including political stability, interest rates, inflation rates, economic performance, and speculation.
Open Demat Account and Start Trading!
​​​​​​​When you invest in India as an NRI, you convert your foreign currency into Indian Rupees (INR). This conversion is essential to understand how your home currency values against INR.
Impact of currency fluctuations on investments
Exchange rate fluctuations can impact NRI investments positively and negatively. The two most prominent ways in which it affects your investments include the investment’s value and the repatriation of funds.
1. Investment value
Suppose you invest in Indian stocks when INR is stronger than your home currency. Two months later, if INR depreciates, you will receive less than the investment amount when you convert your investment to your home currency or repatriate funds. This is even if the Indian market has given positive returns. On the other hand, if you convert your investment when INR appreciates, you will gain and receive more in your home currency.
NRIs must invest in India when INR is weaker than the home currency. Doing so allows you to buy more assets using the same amount of foreign currency.
2. Repatriation of funds
When NRIs convert an India-based investment into the home currency, it is repatriation. If INR is weaker than the home currency, repatriation will reduce the foreign currency received. Conversely, if INR gains strength, you will receive more home currency, even if the domestic market hasn’t fared well.
NRIs should repatriate funds when INR is stronger than the home currency. This way, you can benefit from the exchange rate fluctuation regardless of the market returns.
The other ways currency exchange rates impact NRI investments include:
1. Investment in mutual funds
Exchange rate movements have an impact on mutual fund investments, too. The fund’s Net Asset Value (NAV) can vary with exchange rate fluctuations. If INR appreciates or depreciates significantly during the investment period, your investment returns will be affected.
2. Timing of investment
It is essential to time your investment based on various factors. The currency exchange rate is one of them. A strong home currency means you can get more from your investments. As a result, you should invest more aggressively. On the other hand, if the home currency is weaker against the INR, you will have a smaller investment budget.
3. Tax implications
Tax implications are also a consequence of fluctuating currency exchange rates. When you sell an investment, the taxable capital gains will vary depending on the difference in exchange rate during buying and selling. Make sure you account for these tax implications before making investments in India.
4. Interest and dividend income
Another aspect impacted by currency exchange rates is the interest and dividend income. If you hold Indian shares or bonds, you will receive interest and dividend income in INR. The value of this income will reduce upon conversion if INR weakens against your home currency. Similarly, the income will increase if INR is stronger than your home currency. This movement in INR value can affect the overall return on investment significantly.
Wrapping up
Currency exchange rates are essential in determining the value of investments, especially for NRIs. With the interconnectedness of global economies increasing, you must understand the impact of currency exchange rates. They will help you bolster your investment portfolios and make more informed investing decisions. Once you know how to navigate exchange rate risks, you can achieve your financial goals, like wealth generation or retirement savings.
Financial Calculators: SIP Calculator | SWP Calculator | Compound Interest Calculator | EMI Calculator | FD Calculator | Retirement Calculator | Option Value Calculator | Inflation Calculator | Lumpsum Calculator | PPF Calculator
Popular Stocks: ICICI Bank Share Price | HDFC Bank Share Price | CDSL Share Price | UPL Share Price | TCS Share Price | BHEL Share Price | Trident Share Price | IRFC Share Price | Adani Power Share Price