Now the payoff that makes all of this personal, because you invest across both India and the US. Every time an Indian buys a US asset, something happens that most retail investors never make explicit, and getting it right is the difference between understanding your returns and being baffled by them.
Every cross-border position contains a currency bet. When you, holding rupees, buy the S&P 500 (a dollar asset), you have actually done two things: you bought US equities, and you sold rupees to buy the dollars to do it. You are now implicitly long USD and short INR. Your return, measured in the rupees you actually spend and care about, has two components multiplied together: the asset's return in dollars, and the change in the USD/INR rate:
Return in INR = (1 + asset return in USD) x (1 + USD appreciation vs INR) − 1
You cannot own a foreign asset without owning the currency it is denominated in. The currency is not a side issue; it is a second position you took whether you meant to or not.
Advertisement
Why does the rupee tend to weaken against the dollar?
The INR's structural depreciation: the tailwind, worked. Recall relative PPP: the higher-inflation currency depreciates over time by roughly the inflation gap. India structurally runs higher inflation than the US, say ~4.5% versus ~2.5% (use the RBI's 4% target versus the Fed's 2%). Relative PPP therefore predicts the rupee should depreciate against the dollar by roughly:
Expected INR depreciation ~ India inflation − US inflation ~ 4.5% − 2.5% = ~2% per year
and using headline gaps closer to historical experience, ~3–3.5%/yr, which is almost exactly what USD/INR has averaged over the past several decades (from ~₹18/$ in 1990 to ~₹85+/$ today). This is a structural, near-permanent depreciation of the rupee against the dollar, driven by the inflation differential. For a cross-border investor it has a profound and slightly counterintuitive consequence: for an Indian holding unhedged US assets, the currency is, on average, a tailwind. Because the rupee tends to weaken ~3%/yr, each dollar your US asset is worth tends to translate back into more rupees over time, so the currency adds to your returns rather than subtracting, on average, over long horizons. The mirror image is the warning for the other side: a US investor buying Indian assets faces the same ~3%/yr as a headwind, because the rupee they must eventually convert back tends to buy fewer dollars each year, so Indian equities must clear a ~3%/yr currency drag before a dollar-based investor earns anything.
Structural tailwind one way, structural headwind the other. That asymmetry is the master fact of India–US cross-border investing.
Can the currency outweigh the stock in one year?
But FX can dominate any single year, as one worked example shows. The tailwind is a long-run average; in any given year the currency move can be far larger than the inflation gap and can swamp the equity return entirely. Take a real-ish illustration (2022, approximate): the S&P 500 fell about −18% in dollars, while the rupee depreciated from about ₹74 to ₹83/$ (a ~+12% rise in USD/INR, i.e., the dollar gained ~12% against the rupee). The Indian unhedged investor's return in rupees:
Return_INR = (1 − 0.18) x (83/74) − 1 = 0.82 x 1.1216 − 1 = 0.9197 − 1 = −8.0%
A brutal −18% year in US equities became only −8% for the Indian investor, because the rupee's ~12% depreciation cushioned more than half the loss. The currency mattered more than the stock's own direction in determining the outcome. Now flip it to a year the currency hurts. Suppose US equities rise +10% in dollars but the rupee appreciates ~5% (₹84 → ₹79.8, a risk-on year of heavy foreign inflows into India): (1.10) x (79.8/84) − 1 = 1.10 x 0.95 − 1 = +4.5%, so the currency cut a +10% gain to +4.5%. And in the extreme, if US equities are flat but the rupee depreciates 8%, the Indian investor earns +8% purely from currency on a stock that did nothing. The lesson is stark and permanent: over one-to-three-year horizons, the FX leg of a cross-border position can be the larger driver of your return than the underlying asset. Never attribute a good year in your US holdings to stock-picking skill without first stripping out what the rupee did. The two are separate bets and must be scored separately.
Should you hedge currency risk?
Hedged versus unhedged, and why the answer differs by direction (CIP, again). You can remove the currency bet by hedging, selling dollars forward to lock in the rate at which you'll convert back. But hedging is not a free lunch either way, and its price is set by covered interest parity. Because the higher-yielding rupee trades at a forward discount, the dollars an Indian sells forward stand at a forward premium, so the hedge itself collects the forward points, roughly the INR–USD rate gap, ~2–3%/yr. But CIP has priced those points to equal the rupee's expected depreciation, so the hedger has merely swapped the structural tailwind for its fixed forward-point equivalent, while giving up the two things that actually matter: any depreciation beyond the forward (the big rupee falls arrive precisely in crisis years, when the unhedged cushion is most valuable, per the risk-off dynamic in what moves a currency), and simplicity (rolling hedges carry transaction costs and margin). Net of those costs and the lost crisis cushion, unhedged is usually the right default for an Indian holding US assets for the long run, accepting the year-to-year FX volatility as the price of the structural tailwind and the built-in insurance.
The US investor faces the exact mirror via the same CIP identity. Hedging away INR exposure means selling the high-yield rupee at its forward discount and paying the forward points (~2–3%/yr), which simply pre-charges the structural INR-depreciation headwind. So systematically hedging Indian assets is expensive for a dollar-based investor, and the rupee hedge is less liquid than the majors besides. In practice many foreign investors leave it unhedged and simply demand a higher expected return from Indian equities to compensate for the currency drag (this is one reason foreign capital prices Indian assets the way it does, and it connects to the country-risk premium of M3.02).
What should a two-country investor do?
The practical takeaways for a two-country investor (this is you). Five, to carry into Phase 9:
- Make the currency bet explicit. For every foreign holding, write down the currency exposure as a separate line. You are long USD on your US book; own that.
- For long-horizon US holdings, unhedged is usually fine, even beneficial. The INR's structural depreciation is a tailwind; CIP's forward points merely swap it for a fixed ~2–3%/yr, and hedging surrenders the crisis-year cushion while adding rolling costs. Accept the volatility.
- Expect FX to swamp the equity return in individual years, and never confuse a weak-rupee year for investing skill. Separate the asset return from the currency return when you review.
- Your US assets are a natural hedge against India-specific shocks. Because the dollar tends to rise when global risk-off or an India-specific crisis hits (see what moves a currency and the eurodollar system), and because you spend in rupees, holding USD assets partly insures your rupee-denominated life against a domestic blow-up, a genuine diversification benefit beyond the return itself.
- When you'll spend the money soon, or in INR, reduce the currency risk by holding INR assets or hedging, because over short horizons the FX volatility that averages out over decades can hand you a large loss at the wrong moment. Horizon decides whether the currency is a tailwind you ride or a risk you neutralize.
How does currency risk show up in company results?
Company-level echoes (tying it to the analysis you already do). The same forces run through individual companies, and you should read them in every filing. An Indian IT exporter such as Infosys or TCS (M5.06) earns most of its revenue in dollars and books costs in rupees, so it is structurally long USD/short INR: rupee depreciation lifts its reported revenue and margins (a ~1% INR fall adds ~30–40 bps to margin, roughly; check per company), which is why a weak-rupee quarter flatters Indian IT even when volumes are soft, and why you must strip the currency tailwind out to judge the operating performance. The mirror on the US side: a US multinational like Apple or Coca-Cola earns 50–60%+ of revenue abroad, so a strong dollar hurts its reported (translated-back-to-dollars) earnings. Every strong-dollar quarter, US multinationals blame FX for a revenue "headwind," and you must read their constant-currency growth to see the real business. And an Indian importer or dollar-borrower, an oil marketer or IndiGo (jet fuel priced in dollars, aircraft leases in dollars), is short USD: rupee depreciation raises its costs and inflates its dollar-lease liabilities. The rule that ties it together: find every company's currency exposure, long or short the dollar, through revenue, costs and debt, because for exporters, importers, and dollar-borrowers alike, the FX line can move earnings more than the operations do.
The macro here is not separate from the company analysis of Phase 5. It runs straight through the income statement.