Publication: The Times Of India Mumbai;   Date: Oct 9, 2007;   Section: Your Money;   Page: 46

Most NRIs pay no attention to the rupeedollar exchange rate, until it’s time to plan a trip to India. Then they gasp when they discover that a movie ticket costs six dollars Then it sinks in that even the mighty dollar, once thought to be as good as gold, is a paper currency that is worth only what others think it’s worth. And right now, people outside the US (and economists and professors in that country) have a gloomy outlook on the dollar.  

In the past year, the dollar has slid 15%, eroding dollar-centric portfolios. Whether we act or do nothing about it, the reality is that dollar depreciation (or rupee appreciation) will have a tremendous impact on our future.

The past year has been a rude shock to people who thought the dollar would ride high forever. The dollar, at Rs 13 in 1986, moved to Rs 47 in 14-15 years, which was an era of unprecedented economic prosperity in the US. However, believing the dollar would remain at these levels and keep gaining strength is just wishful thinking. I hardly need to point out that currently, India is also witnessing an era of unprecedented economic prosperity. Most people abroad who have some connection with India, are aware of the economic growth here. The 30% rise in corporate earnings have sent the Sensex up from 3,000 in 2003 to 16,000 now. With low interest rates, and low base prices, real estate, too, has witnessed a boom. The 8-9% growth in the GDP will at some point be reflected in our currency, so the rupee will appreciate against the dollar. Our economy, currently the second fastest growing economy, has received investments from foreign institutional investors, private equity players, and foreign direct investments, which are growing every year.

A recent Business Week column observed: “The weak US dollar just got weaker, hitting its lowest level ever against the euro on September 12. The hit to Americans’ buying power abroad is substantial, as any tourist back from a summer vacation in Europe can tell you. But, so far, policymakers and market experts seem unruffled.”

At the root of the dollar decline is a simple fact: America does not save enough. Most Americans live beyond their means, regardless of whether they are creditworthy or not. The world’s most powerful economy has a current account deficit of $800 billion. Going by current information, it is difficult to see this deficit reducing in the future. In the absence of adequate domestic savings, the US borrows about $4 billion a day to keep its economy going. This would put most economies in a crisis, but the US managed to keep it up because of the privilege its currency enjoyed until last year. Foreign investors were happy to keep investing in the US. Asian central banks have US dollar reserves of some $2 trillion. A plunge in the dollar would erode their value. So it is in Asian central banks’ interest not to let the dollar fall, and to gradually look at alternatives. Already, India, Russia and China are quietly moving money out of dollars and into euros. If this trickle were to become a flood and suck billions out of the US economy, what would happen? The US may see a recession, which would hurt other countries that rely on exports.
Central Banks all over the world have started hedging against the dollar. We are certainly not saying the dollar will tumble soon. But how will it affect you if the dollar reaches Rs 35 in the next five years, and Rs 15 in the next 15-20 years? Consider this example. If you invested Rs 3 crore in a dollar portfolio at today’s rate (around Rs 40), the portfolio would be worth about $750,000. If the exchange rate in 2022 is Rs 15 (for the sake of simplicity, we are not considering inflation here), your portfolio will be worth US $2 million.

The US central bank announced a 50-basis-point rate cut in September. As expected, this diminished the appeal of dollar-denominated assets and sent the dollar lower.
What should investors do? The biggest gainers from big moves in the dollar may be American investors in overseas stocks. In fact, US financial planners advise clients to include foreign stocks in their portfolios, to benefit from faster growth overseas.
No one can say at what pace the dollar will keep sliding, or whether the fall will be consistent. Whether it stays put or falls, it makes sense to diversify one’s portfolio to include countries where growth projected for several years.

What about NRI investors? They should consider India a serious investment option, and invest in rupees with a time horizon of 10-20 years. Even though returns will be lower than in past years, it’s still a goldmine. You will be able to get more dollars when you convert your rupee investments back, even investments that didn’t grow. Don’t wait for the dollar to reach Rs 35 or lower. The root cause of most personal finance disasters is procrastination. Don’t let procrastination affect your wealth.

Amar Pandit is a certified
financial planner and Director,
My Financial Advisor