Foreign Exchange (Forex)

Full form: Forex / FX

Investments

Foreign exchange is the trading of currencies. India's forex market determines the USD/INR exchange rate. As of 2024, USD/INR is approximately 83-84. Forex rates affect: import costs, NRI remittances, international fund returns, and global commodity prices in INR.

In detail

Factors affecting INR/USD rate:nRupee weakens when: large trade deficit, FPI outflows, rising US interest rates, high oil prices (India imports 85% of oil), global risk-off eventsnRupee strengthens when: strong FPI inflows, NRI remittances, RBI forex intervention, strong India growth storynnForex rate impact on your finances:nEMI on foreign education loan: Rs 10L @ Rs 70/USD vs Rs 84/USD = very different INR amountnOverseas travel: weaker Rupee = more expensive travelnImport prices: weaker Rupee = higher smartphone, electronics, fuel pricesnInternational MF: weaker Rupee amplifies gains when USD investments appreciate

Formula

Forex gain on USD investment = (Ending exchange rate - Starting rate) / Starting ratenTotal return = USD return + Currency appreciation/depreciation

Real-life example

🇮🇳 India example

Suresh invested USD 5,000 in US S&P 500 via LRS when rate was Rs 72/USD (cost Rs 3.6L). Three years later: S&P 500 up 25%, USD/INR now Rs 84. USD value: USD 6,250. INR value: Rs 5.25L. Total INR return: Rs 1.65L = 45.8% on Rs 3.6L invested. S&P 500 gave 25% in USD + 16.7% Rupee depreciation = 45.8% combined.

Frequently asked questions

Should I worry about forex risk when investing internationally? ▼
Yes, but it is manageable. Rupee has historically depreciated approximately 4-5% per year vs USD. US assets (S&P 500) have historically returned 10-12% in USD. Net: Indian investors in US ETFs have earned 14-17% in INR terms historically -- exchange rate benefit, not risk.