Mounting fears of economic damage from the COVID-19 pandemic has increased buying of the American currency, strengthening its value and in turn adding pressure on the Indian rupee.
This week, the domestic currency depreciated by 124 paise. It is down by over 6 percent from the start of the year and hit a new all-time low of 76.40/dollar in March.
On Friday, the Indian rupee closed at 76.13 against the US dollar, amid heavy selling in domestic equities.
While the Reserve Bank of India (RBI) has been taking steps to prevent sharp fall, the unprecedented coronavirus crisis will continue to add pressure on the rupee till the pandemic subsides and the economy starts recovery.
As an investor, you may be concerned about the yield from your investments that have already been hurt by the dramatic losses in stock markets. Interest rates on small saving schemes like PPF were also recently cut by the government.
High-level bond yields
Rupee's weakness keeps bond yields at a higher level. On 3 April, the first day of trading in the bond market since the borrowing calendar was announced, the benchmark 10-year yield shot up to 6.32 percent from 6.14 percent on Tuesday, to close at 6.30 percent. Bond markets were closed on 1 and 2 April.
This week, yields in the bond market rose as bond dealers fear an increase in government borrowing to finance the stimulus packages and other expenses due to the spreading coronavirus pandemic.
Bond yields and their prices are inversely related, which caused a fall in the prices of government bonds on the first day of trading in the new fiscal.
Rising yields are not very comforting for both lenders and businesses, who would want to offload these government securities to meet capital needs. It will also make corporate borrowing costlier, hurting their profits and devaluing your stock investments and dividend earnings potential. It will also affect the performance of the government bond schemes in NPS (National Pension System).
If you had been saving for a holiday or education abroad, the projected costs will have substantially increased from what you last planned.
For example, if you had planned to make a booking at 4,000 USD when the rupee was valued at 70/dollar, while the price of the package may not have changed from 4,000 USD yet, your booking will cost you Rs 6 extra per dollar, which will be Rs 24,000 more.
How to protect your savings from depreciating?
The Indian rupee is known to have depreciated by an average of 3 percent every year. The current pandemic crisis across the globe has only added to the pressure.
Ways to curb your losses will depend on your financial goal.
For example, if you are saving for your child's education in the US, you may want to consider investing in US equities through a variety of mutual fund options that allow you to invest in the American markets. The gains made will benefit from the strength of the US dollar.
Similarly, if your financial goal is for a holiday in Europe or any other plans in the continent, you may want to follow the movement of Euro or the British pound against the rupee to decide on an investment strategy.
As for your investments in the Indian markets, you may look at the sectoral impact of the rupee's depreciation. For those who gain most of their profits from exporting their products, the dollar's strength over the domestic currency will prove profitable. For example, the IT or pharma sector.
On the other hand, companies in capital-intensive sectors, with higher dollar debts, foreign currency borrowings and those importing raw materials heavily, will be hurt by rupee's fall. For example, Indian aviation companies and OMCs.
A further fall in the rupee is likely as oil prices have started to recover and India will most probably breach its fiscal deficit target considering the uncertainty of the coronavirus pandemic, that will not only lower the government's tax revenue but also increase borrowings to finance aids during the crisis.