Do forex movements affect your investment returns?

Podcast Duration: 06:11

Hello friends – welcome to another informative Angel Broking Podcast.
At the time of preparing this podcast the rupee-dollar exchange rate stood at a staggering 78.88 rupees to a dollar. Now I think you will agree with me when I say that the pre-covid exchange rate of 70 rupees to a dollar was bad enough – today’s is rather hard to stomach…. And that’s not even because you’re overdoing the lockdown snacks.

On the bright side, since we are locked up at home we will not need to buy dollars for vacations this summer – after all there will be no trips to exotic destinations happening this year and consequently there is little need for most people out there to have to buy forex.

However, the question at hand for investors is – do these forex investments have any effect on investments? And if yes, is the effect positive or negative?

The answer is that it depends on the type of investment at hand. Some investments are indeed affected by fluctuating forex rates and others remain buffered no matter how drastic the forex movements are.

Let’s explore by going over the various types of investment options out there:
For example, if you are investing in forex, then – but obviously – your investment will most certainly be affected by forex movements. Variables such as your chosen base currency and the currency you are holding will determine whether your investment will be impacted positively or negatively. Let’s say you are holding USD and had purchased dollars back when the rate was INR 70 to USD 1! If you sell while the dollar is on a high (that is to say when you sell at a higher rate than you bought at), you will reap good profits. Looks like you’re having a lucky lockdown!

Most traders conduct their trading on either BSE or NSE. However, if you are trading on the international stock exchange, then your investment will be impacted by fluctuating forex movements. With the rupee at a low, you will get fewer shares for the same amount of capital as compared to when the rupee was higher. Here’s an example to help you wrap your head around this: If you did a long weekend trip to Thailand five years ago when the exchange rate was 1.5 or maaax 1.6 rupees to a thai baht, you probably enjoyed a super trip and a ton of shopping within rupees 45,000. However, you may struggle to fit the same experience in rupees 60,000 with the exchange rate placed at 2 rupees to a baht.

If you invest in securities and commodities and these are traded in another currency, the impact of fluctuating forex rates is pegged on the status of the currency that you buy and sell your securities and commodities in. When the currency value falls, the value of the securities or commodities held also drops. Similarly when the relevant currency increases in value, the value of the stock will rise correspondingly.

Stock market investments are not directly affected by forex movements but the relationship between forex rate fluctuations and stock prices is a lot like the relationships that most millennials have – its complicated.

It’s like this: There is no direct relationship between stock price and forex movements. The price of a given stock is driven by demand-supply economics and the company’s financial health.

However the company’s financial health could – in some cases – be impacted by the highs and lows of a given currency. Let us assume that you are holding the stock of ABC Public Limited. Now ABC does business in the US and as a consequence, a rising or falling dollar will certainly dent or inflate ABC Limited’s balance sheet. If ABC Limited sells in the US and therefore earns in dollars, then a rising dollar bodes well for them. This is because when converted to INR, they would have earned a higher amount than when the dollar-rupee exchange rate was lower. For example if ABC Public Limited sells headphones for USD 50 apiece, back during when the exchange rate was rupees 70 to one dollar, the company earned Rs 3,500 per pair of headphones sold. But at an exchange rate of rupees 78.88 to one dollar, ABC Public Limited will earn Rs 3,944 per pair of headphones.

In case of the reverse – for example, perhaps ABC Public Limited imports spare parts from Japan and the Yen increases against the rupee. In such a situation, ABC Public Limited’s costs will increase and this will negatively impact its earnings.

Additionally, a falling rupee results in correspondingly rising increase rates extended by the RBI to finance companies such as banks, NFBCs and insurance companies. This could negatively impact their financial health.

There is also something to be said for the effect of the stock market on forex rates. When the stock market is performing well, foreign investors come around like bees to honey… like a moth to the flame ….like DJ Khaled to a popular new artist. This means increased FDI and increased FDI means a that the currency of the given country becomes stronger.

That about wraps up the complex answer to whether forex fluctuations affect stock market investments. For a breather let’s look at one of the simpler ones – how do forex movements impact fixed deposits?

I promised simplicity and here it is. The impact is nil. Let us say that you have opted for a fixed deposit for six months at 5.71% interest, at the end of those 6 months, you will receive your capital along with the promised 5.71% interest – provided of course (given the uncertain times we are in) that the bank does not shut shop.

What about gold you ask. Of course, we cannot be having this discussion among Indians and not discuss the impact of currency fluctuations on investments in gold – and you will be happy to note that that a skyrocketing dollar has a correspondingly positive effect on gold investments. If your gold was worth INR 700,000 when the exchange rate was rupees 70 to a dollar, then at rupees 78.88 per dollar that gold is now worth 788,800. Ka - ching!

On that happy note, we can conclude this discussion on the relationship between forex movements and your investments. I suppose you’ve gathered but there’s no simple answer and you will always need to dig deeper and look at various factors before arriving at an answer that is correct for your specific investment category and your specific investment.
On that note, stay safe and happy investing.