Quick answer: When you invest abroad, your INR returns are driven by both the asset’s local performance and the USD/INR move. A rising USD (INR depreciation) boosts your rupee returns; a stronger INR reduces them. You can accept, partially hedge, or fully hedge this currency risk using simple rules of thumb, NSE currency derivatives, or currency-aware fund choices. (NSE India)
Last updated: 15 August 2025
Why currency moves matter to Indian investors
Whether you buy the S&P 500 via an international mutual fund, hold USD deposits, invest in US Treasuries, or own global gold ETFs, your rupee outcome changes with USD/INR. India follows a managed float—the RBI allows market forces to set the rupee but intervenes to smooth volatility—so currency is a genuine, ongoing driver of portfolio returns. (MoSPI, Reuters)
The two-return equation (simple but powerful)
Use this identity whenever you evaluate an overseas position:
(1+RINR)=(1+Rlocal)×(1+RFX)−1(1+R_{\text{INR}})=(1+R_{\text{local}})\times(1+R_{\text{FX}})-1
- RlocalR_{\text{local}}: Asset return in its home currency (e.g., USD).
- RFXR_{\text{FX}}: Currency return for USD vs INR (approx. % change in USD/INR).
- For small moves, INR return ≈ local return + FX return.
Example: You buy a US index that gains +8% in USD. Over your holding period, USD/INR rises 4% (INR weakens).
Approx INR return ≈ 8% + 4% = ~12%. Exact: 1.08×1.04−1=12.32%1.08 \times 1.04 -1 = 12.32\%.
What drives USD/INR over time?
- Interest-rate differentials & inflation: Higher Indian inflation than the US tends to pressure INR over long cycles.
- Current account balance & crude oil: India’s oil imports make the INR sensitive to crude spikes.
- Capital flows: FPI inflows/outflows can move the rupee quickly.
- RBI policy & FX reserves: The RBI leans against disorderly moves in spot and NDF markets under a managed float. (Reuters)
How currency risk shows up by asset class
1) Global equities (US, Europe, Japan):
- Currency adds another return source. INR depreciation amplifies rupee returns; INR appreciation dampens them.
- Export-heavy Indian stocks (IT, pharma) can act as a natural hedge because their USD revenues often benefit from a weaker INR.
2) Global bonds (USD Treasuries, IG credit):
- Typically lower local-currency volatility, but FX can dominate overall INR volatility if unhedged.
3) Gold:
- Gold in India is priced off international USD gold and USD/INR. A weaker INR can push domestic gold to new highs even when USD gold is flat, which we’ve seen repeatedly in recent years. (World Gold Council)
Hedge it or not? A practical framework
Decide your hedge ratio (0%–100%) based on horizon, goals, and cash-flow needs:
- Long-term wealth building (≥7 years):
- Often acceptable to leave FX unhedged for equities; currency noise tends to diversify equity risk across cycles.
- Consider partial hedges (25–50%) during periods of stretched USD/INR (after sharp rupee weakness) to smooth near-term volatility.
- Short- to medium-term goals (≤3 years) or fixed INR liabilities:
- Prefer higher hedge ratios (50–100%) on global bonds or income-oriented exposures to protect INR purchasing power.
- INR income, USD spending (e.g., child’s US college in 2–4 years):
- Hedge most of the FX—your liability is in USD.
The cost of hedging (and why it matters)
Forwards/futures reflect interest-rate differentials. A simple approximation for a 12-month forward is:
F≈S×(1+rINR)(1+rUSD)F \approx S \times \frac{(1+r_{\text{INR}})}{(1+r_{\text{USD}})}
If INR rates exceed USD rates, buying USD forward typically costs a positive “carry”. That cost drags on hedged returns—acceptable for capital protection, but relevant for long-term growth. (Contract access and margins are available on NSE’s USD/INR futures & options.) (NSE India)
Implementation options in India
1) Currency derivatives (DIY or advisor-led):
- USD/INR futures & options on NSE: standardized contracts, cash-settled; useful for partial hedges aligned to your overseas exposure size and tenor. (NSE India)
2) Fund route:
- International mutual funds/ETFs (unhedged): Most India-domiciled international FoFs keep currency exposure open—expect FX to influence returns. Scheme documents and factsheets disclose this. (Securities and Exchange Board of India)
- Hedged share classes/strategies: Rare from India-domiciled funds; more common in offshore products. Check scheme information documents for derivative use policies. (Securities and Exchange Board of India)
3) Natural hedges in the core portfolio:
- Export-tilted Indian companies can offset INR strength/weakness, but match is imperfect (basis risk).
Risk controls and portfolio hygiene
- Sizing: Keep global allocation aligned to your risk profile (e.g., 15–30% for many Indian investors; HNIs may go higher with governance and liquidity filters).
- Rebalancing bands: Use +/- 20% bands around target global weights; rebalance annually or when breached.
- Staggered entry (SIP): Reduces timing risk in both asset and FX.
- Avoid over-hedging: Don’t exceed the economic exposure; review hedge notional after big market moves.
- Compliance: Overseas investing by residents is under RBI’s LRS (up to USD 250,000 per financial year per individual; documentation & TCS rules apply). Work with an AD bank and a SEBI-registered intermediary. (Reserve Bank of India)
A quick “what-if” calculator (by hand)
- Note local return (USD): US Tech ETF = +10%.
- Note USD/INR move: from 83.0 to 86.3 (+4% USD).
- INR result ≈ 10% + 4% = 14%.
- Exact: 1.10×1.04−1=14.4%1.10 \times 1.04 – 1 = 14.4\%.
Interpretation: Your rupee return is higher than the USD return because the INR weakened.
Cheat sheet: Currency impact by asset & tool
| Asset/Exposure | INR depreciation (USD up) | INR appreciation (USD down) | Hedge tools available in India |
|---|---|---|---|
| US/Global Equity Funds | Boosts INR returns | Dampens INR returns | NSE USD/INR futures/options; select scheme-level hedges (NSE India, Securities and Exchange Board of India) |
| US Treasuries/Global Bonds | Material boost from FX, can dominate | Cuts INR returns | Prefer higher hedge ratios for short horizons; NSE derivatives (NSE India) |
| Gold (domestic) | Often amplifies gains in INR terms | Can offset USD gold strength | Typically unhedged; domestic pricing embeds FX (World Gold Council) |
Compliance corner (bite-sized)
- Regime: INR is a managed float—RBI steps in to curb disorderly moves, not to fix a level. (MoSPI)
- Access: Currency derivatives trade on NSE with defined margins/position limits. (NSE India)
- LRS: Resident individuals can remit up to USD 250,000 per FY for permitted investments; use authorised dealers. (Reserve Bank of India)
FAQs
Q1. Should I always hedge foreign equity?
No. For long horizons, leaving equity unhedged can add diversification and sometimes a tailwind. Consider partial hedges to manage volatility when you have near-term cash needs.
Q2. What about global bonds?
If your liabilities are in INR and the goal is stability/income, hedge more (50–100%) so currency doesn’t dominate returns.
Q3. Does RBI “fix” the rupee?
No. The RBI manages volatility in a floating system; it does not commit to a fixed rate. Interventions occur in spot and derivative markets as needed. (Reuters)
Q4. How do taxes work on international funds?
Tax rules differ from Indian equity funds and have changed in recent years. Review scheme tax sections and see our explainer “How are Mutual Funds Taxed?” for the latest.
Putting it together: A simple policy you can actually follow
- Set your global equity weight (e.g., 20%).
- Default unhedged for equities; hedge bonds unless horizon is long.
- Add a 25–50% tactical hedge when USD/INR has already jumped sharply in a short time (vol control, not a bet).
- Rebalance annually or at band breaches.
- Document under LRS, and route FX via an AD bank; check scheme documents for any built-in currency management. (Reserve Bank of India, Securities and Exchange Board of India)
Related reading on Endovia Wealth
- Investing in US Markets from India
- Global Diversification: How NRIs Should Think About It
- How to Declare Foreign Assets in ITR
- How Are Mutual Funds Taxed?
- Sovereign Gold Bonds vs Physical Gold
Bottom line: Currency is not a sideshow—it’s a core driver of your global results. Use the return-breakdown formula, pick a sensible hedge ratio based on your time horizon and liabilities, implement with NSE currency tools or suitable funds, and keep your paperwork LRS-compliant. That’s how Indian investors turn currency from an anxiety into an advantage. (NSE India, Reserve Bank of India)