What a weakening rupee means for India – and your portfolio

livemint.com:

For the past nine months or so we’ve been seeing headlines almost every day that the Indian rupee has touched a new low. While the fall in the value of our currency can be psychologically unsettling, it’s important to put it into perspective and gauge its impact on your investment portfolio. 

In March the rupee was at 82.77 to the US dollar. Currently, it is around 85.25, which is a drop of about 3%. We will look at the reasons for this depreciation, but the important point is that our external situation – as measured by our current account deficit (CAD) and balance of payments (BoP) – is under control.

In October and November, foreign portfolio investors (FPIs) were significant net sellers of Indian equities, which put pressure on the rupee and kicked off the latest phase of depreciation. This event must be seen in the context of global developments. 

Also read: 5 key takeaways from the PPFAS annual unitholders’ meeting

To state the obvious, the rupee is measured against the US dollar, so the strength of the dollar impacts our currency. The strength or weakness of the US dollar is measured against a basket of six major currencies with defined weights. This basket is referred to as DXY. The major impetus for DXY movement is interest rate changes, or expectations such changes, by the US Federal Reserve.

Ever since the US presidential election in November, there have been certain expectations on the policies Donald Trump will implement. These are expected to lead to higher inflation and a higher fiscal deficit for the US. In light of this, the market has toned down its expectations of rate cuts by the Fed over the next year, from one percentage point to half a percentage point. On top of this, investments from all over the