Case 026Market view and security pitchCore

A client will need dollars for a goal five years out but holds almost everything in rupees. What does a weaker rupee cost him, and how much of his portfolio should sit in dollar assets?

The situation

Rohit Ahluwalia-Das has a Rs 8 crore portfolio, almost all of it in rupee equity and debt. In five years his daughter starts a degree abroad that costs USD 240,000 in total. At today's rate of 83 rupees to the dollar that is Rs 1.99 crore, about Rs 2 crore, and he thinks of the goal in those rupee terms.

Over the last two years the rupee has moved from 83 to 88 in a scenario he asks you to plan around. For this case, keep the dollar cost of the degree fixed and ignore interest on both sides at first; the interest point comes at the end.

Your task

How much more does the goal cost if the rupee reaches 88, and what if the same pace continues to year five? How much of the portfolio should be held in dollar assets, and why that much and not more?

Quick check

If the rupee weakens from 83 to 88, how much more does the goal cost in rupees?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

At 88 the goal costs Rs 12.0 lakh more, and if the same pace runs to year five, about Rs 31.4 lakh more. The goal is a dollar liability, so the matching asset is dollars. Holding the goal's size in dollar assets, about 25% of his portfolio, removes the currency gap for that goal. Holding more would be a currency bet, not a hedge.

Step 1Why is this a dollar goal even though Rohit thinks in rupees?

A family saving for a wedding in Kochi and paying in rupees has a rupee goal. The university bills in dollars, so Rohit's goal is USD 240,000, and the rupee figure he carries in his head is only today's translation. A goal's currency is the currency of the bill, not the currency of the saver. Every rupee the currency loses against the dollar adds USD 240,000 of rupees to the bill: at 88 the cost is Rs 2.11 crore, up Rs 12.0 lakh.

Step 2What happens if the rupee keeps weakening at the same pace?

Going from 83 to 88 in two years is about 3.0% a year. Carry that pace to year five and the rate is about 96.1. The goal then costs Rs 2.31 crore, Rs 31.4 lakh or 15.7% more than the rupee number Rohit is saving towards. That gap does not come from markets falling; it comes from a mismatch between what he owns and what he owes.

What the dollar goal costs in rupees, and how much of it is covered1.82.02.22.48083889296100Rupees per dollar when the money is neededRs croreGoal cost = all in dollarsHalf in dollarsAll in rupeesgap Rs 31.4 lakhtoday: 1.99at 88: 2.11
The rupee cost of the USD 240,000 goal rises from Rs 1.99 crore at 83 to Rs 2.11 crore at 88 and Rs 2.31 crore at 96; money held in rupees stays flat, so the gap grows with the rate, while money held in dollars rises with the bill and closes it.
Rate at year 5Goal cost, Rs croreGap, all in rupeesGap, half in dollarsGap, goal fully in dollars
831.990.00.00.0
882.1112.06.00.0
922.2121.610.80.0
962.3031.215.60.0
Gaps in Rs lakh. Holding half the goal in dollars halves the shortfall at every rate; holding the whole goal in dollars removes it, whatever the rupee does.
Step 3So how much should sit in dollar assets?

Size the dollar holding to the dollar liability. USD 240,000 is Rs 1.99 crore, about 25% of Rohit's Rs 8 crore, and that is the amount that belongs in dollar assets for this goal. Because the money is needed in five years, most of it should be dollar debt or cash-like holdings that will not fall 30% the year the fees are due. A sensible path is to move half now and the rest over the next two years, so that the goal is fully matched by the time it is two years away.

Here is the limitation to say out loud. Interest rate parityThe idea that the gap between the interest rates of two currencies tends to match the expected fall in the higher-rate currency, so neither side earns more on average once exchange moves are counted. means rupee debt usually pays more than dollar debt, and that extra interest roughly offsets expected depreciation. At an illustrative 7% on rupee debt and 4.5% on dollar debt, rupee money pulls ahead unless the rate passes about 93 by year five. So the dollar holding does not raise Rohit's expected wealth; it removes the spread of outcomes around the one date that matters. Moving money abroad also runs through remittance rules and limits, and any tax collected at source on remittances, so confirm the current figures before acting.

Where candidates lose it

The common miss is treating the goal as Rs 2 crore because that is how the client described it. Candidates then plan a rupee portfolio and never mention currency at all, which is the one risk the interviewer built the case around.

The opposite miss is overshooting: moving half the Rs 8 crore into dollars because the rupee has been weak. That turns a hedge into a currency view. Match the liability, then stop.

What the interviewer asks next

  • The university raises fees 4% a year in dollars. How does that change the amount you hold in dollars?
  • Would you hold the dollar money in US equity, US debt or an Indian fund that invests abroad, and why?
  • The rupee strengthens to 80 after you move the money. How do you explain that to Rohit?

Company names and figures are illustrative.