For Non-Resident Indians, getting in on India's booming economy is exciting. But there's a quiet, unpredictable factor that can make a huge difference to returns: currency fluctuations. Managing NRI investments currency fluctuations isn't just about watching a live exchange rate; it's about understanding the deep impact that global currencies have on real wealth. This guide reveals the surprising truth about currency risk and shows simple, practical ways to protect portfolios.

Understanding Forex Risk

As an NRI, currency risk appears in two main ways:

• On investment: Funding from dollars, pounds, or dirhams to INR creates an exchange-rate dependency at entry.

• On repatriation: Repatriation of money is converting INR gains to the home currency; unfavorable FX rates may destroy the real gains.

This is a risk that is alive on all investment touchpoints: FDs, stocks, mutual funds, real estate, or offshore products. The high investment exchange rate could be negated by low exit rate so it is important to closely monitor and plan.

But what causes these swings? The value of currencies is not arbitrary, it is a measure of the economic wellbeing of a country, and it is affected by a number of important factors:

• Inflation: The purchasing power of the currency in a country is reduced when its inflation rate is more than that of its trading partners, which normally results in depreciation.

• Interest Rates: When interest rates are high, it is likely that foreign capital will be attracted with better returns. This boosts the demand of the currency and makes it strong. As an illustration, when the Federal Reserve of the U.S. increases the rate, it tends to make the dollar stronger and strains the rupee.

• Political and Economic Stability: The political stability and economic perspective of a country is important. Capital flight may be occasioned by instability or poor economic projections, which will result in a weak currency as investors transfer money to the safe havens.

• Trade Balance: A country that has a trade deficit has an increased demand of foreign currency to finance imports and this may undermine its currency.

How a Stronger/Weaker Rupee Impacts Investments

The Role of Central Banks and Government Policies

The currency movements are not market driven but are greatly affected by monetary policies of central banks such as the Reserve Bank of India (RBI) or the U.S. Federal Reserve (Fed).

• Monetary Policy: The move by the Fed to increase interest rates will make the U.S. dollar assets more appealing to international investors. This heightened demand of the dollar boosts the value of the dollar and in most cases the rupee tends to lose value compared to the dollar.

• Market Intervention: The RBI actively participates in the forex market to control the volatility. In order to avoid the rupee depreciating too fast, the RBI sells the U.S. dollars in its foreign exchange reserves which inflate the amount of dollars in the market and stabilize the value of the rupee.

Strategies to Mitigate Currency Risk

Though the forex market is uncontrollable, the risk can definitely be mitigated. The following are some of the practical approaches to currency risk management to NRI investors:

• Geographic Diversification: Do not keep all the money in one currency. Intelligent investors diversify their portfolios in assets of other countries and currencies.

• Long-Term Investing: The effects of currency fluctuation in short-term NRI investments are usually crazy, but the effect can be levelled over the long run. Long term perspective is useful in weathering these turbulent times.

• Systematic Investment Plans (SIPs): SIPs are a dollar-cost averaging of NRIs. Investors ensure that they buy a certain quantity of home currency every month, which automatically causes them to purchase more rupees when the rupee is weak and less when it is strong. This field automatically levels out the mean exchange rate during the investment period.

• Match Investments to Goals: In case the plan is to buy a house in India, then there will be a less amount of currency risk, as the currency will be INR. But in the case of saving to send a child to a foreign country college, it would be wiser to save in assets that are pegged to foreign currency.

• Hedging Strategies: More experienced investors can use tools like currency futures or options to lock in an exchange rate for future dates, providing protection against market swings.

Tax Implications of Currency Fluctuations

A frequently overlooked aspect of NRI investments currency fluctuations is how they impact the tax bill. Until recently, investors were often taxed on "notional" gains - profits in INR created simply by the rupee's depreciation.

Clause 72(6)

The Income Tax Bill, 2025, has introduced significant relief for NRIs. Clause 72(6) permits calculation of capital gains on certain unlisted Indian shares and debentures in the same foreign currency used for investment. This means investors are now taxed only on real economic gains in their home currency, not on inflated gains caused by rupee depreciation.

• Old Regime: An investor buys shares for $100,000 (₹75 lakh) at an exchange rate of ₹75/USD. They're sold for ₹90 lakh when the rate is ₹90/USD. The capital gain is ₹15 lakh, and tax is paid on this amount.

• New Regime (Clause 72(6)): The gain is computed in dollars first. The original investment was $100,000. The sale proceeds are ₹90 lakh / ₹90 = $100,000. The actual gain is zero dollars. No capital gains tax is paid, as there was no real gain in home currency.

Note: The capital gains tax relief for forex fluctuations under Clause 72(6) applies specifically to unlisted shares/debentures and not all listed assets unless later amendments specify wider coverage.

New Tax Rules and DTAA Implications (2025)

The 2025 tax amendments have introduced significant changes to NRI investors with regard to Clause 72(6). These changes are in addition to the Double Taxation Avoidance Agreements (DTAA) to give an improved environment to invest.

Key Changes in the New Tax Framework

• Expanded Currency Relief: Although Clause 72(6) applies to unlisted shares and debentures, the new rules apply the same relief to other types of investment. Equity investments are now listed and can receive benefits of fluctuation of foreign exchange under certain conditions.

• DTAA Enhancement: The new provisions of the DTAA in India enable the NRIs to enjoy tax credits more effectively. The rate of withholding tax on dividends and interest has been harmonized in the key jurisdictions and has decreased the total tax rate of investors in the states such as UAE, Singapore, and the UK.

• Simplified Compliance: The new framework eliminates multiple form filings for currency-related adjustments. A single declaration now covers foreign exchange gains and losses across different asset classes.

Impact on Different Investment Types

• Mutual Funds: NRIs can now claim DTAA benefits on capital gains from equity mutual funds, provided the investment was made through NRE accounts. The effective tax rate drops significantly for investors from treaty countries.

• Real Estate: While property investments still face higher currency risk, the new rules allow indexation benefits to be calculated in the investor's home currency for properties purchased after April 2025.

Managing NRI investments currency fluctuations requires a smart and well-thought-out plan. Rupeeflo was created to solve the unique challenges of cross-border investing. Our platform gives you the tools and insights you need to navigate the complexities of forex risk. We help you choose the right investments that match your financial goals, so you can focus on growing your wealth, not just worrying about exchange rates.

FAQs

1. How to calculate returns with currency fluctuations? 

The simple way is to take final INR proceeds, convert them back to home currency at that day's rate, and then see the gain or loss from the original investment amount in home currency. That's the only way to know the true INR to USD exchange rate impact.

2. Is it better to invest with an NRE or NRO account to manage currency risk? 

It depends on where money came from. NRE accounts are funded with foreign income and can be freely repatriated, which gives more flexibility. NRO accounts hold Indian-sourced income and have repatriation limits.

3. What's the best way to hedge investments? 

For most people, the best way is through smart planning and diversification. Advanced hedging tools are often complex and can be expensive, making them a better fit for institutional investors.