What Are Currency Exchange Rates?
A currency exchange rate is the value of one country’s currency in comparison to another country. Think of it as a price you need to pay to buy a foreign currency. For example, if 1 USD = ₹75. You’ll need ₹7500 to get $100 in exchange.
Exchange rates are essential not just in international finance and trade, but they also play a crucial role when you invest in foreign markets. For Indian investors buying US stocks, the conversion of INR to USD (and vice versa when selling) directly affects the amount of money invested and the returns earned.
It’s important to understand that exchange rates are dynamic. They fluctuate daily, but before exploring why they fluctuate, let’s first look at the types of exchange rate systems.
How Does Currency Exchange Rate Work?
Countries manage their currencies in different ways, leading to two main types of exchange rates
1. Fixed Exchange Rate
In this system, the value of a currency is pegged to another currency or a basket of currencies. The government or central bank actively maintains this fixed rate by buying or selling its currency to match the pegged value.
- Example:
The UAE Dirham (AED) is pegged to the US Dollar at AED 3.67 per USD. This means no matter how much the dollar’s value fluctuates globally, 1 USD will always equal AED 3.67.
Fixed exchange rates provide stability and predictability, making them beneficial for international trade. However, they limit a country’s ability to respond to economic changes.
2. Floating Exchange Rate
Under this system, the value of a currency is determined by market forces - specifically, the demand and supply of the currency in the foreign exchange (forex) market. Most major currencies, including the USD and INR, follow a floating exchange rate.
- Example:
On one day, 1 USD might equal ₹80, while the next day, it might drop to ₹78 or rise to ₹82, depending on market conditions.
Floating exchange rates are more flexible and allow a country’s currency to adjust to economic changes, but they also lead to more volatility.
Here’s an example of some countries with fixed and floating exchange rates:
| Fixed Exchange Rate | Floating Exchange Rate |
| China | United Kingdom |
| Nepal | Japan |
| Qatar | Canada |
Why Do Currency Exchange Rates Fluctuate? Factors Affecting These Rates
Exchange rates are usually decided on the basis of the supply and demand of currencies in the foreign exchange market.
Factors such as economic activity, political stability, unemployment rate, etc play a role in the movement of supply and demand of a country’s currency.
Let’s understand the key factors affecting the exchange rates:
1. Inflation
Inflation is a measure of how much the price of a country’s goods and services rise over time. A low inflation rate means prices are stable, and the country’s currency retains its value. While, high inflation reduces the purchasing power because you need more money to buy the same amount of goods and services.
Example: Imagine two countries, A and B.
- In Country A, inflation is low, and the price of bread increases from $1 to $1.10 over a year.
- In Country B, inflation is high, and the price of bread jumps from $1 to $2 at the same time.
Foreign investors will prefer Country A because the value of their invested money doesn’t decrease as much over time because of inflation. As a result, Country A’s currency becomes stronger, while Country B’s currency weakens.
2. Interest Rates
Interest rates are rewards for saving or investing money. When interest rates are high investors get better returns which attracts foreign investors. Let’s say the US offers a 5% interest rate on savings, but Europe offers only 2%. Foreign investors will choose to save or invest in the US because they’ll earn more. To invest in the US, they need US dollars, increasing demand for the currency and making the dollar stronger.
3. Public Debt
Public debt is the total amount a government owes to domestic or international creditors. High public debt can deter foreign investors as it signals potential financial instability or the risk of default.
- Countries with high debt & unmanageable → Lower investor confidence → Weaker currency.
- Countries with low, manageable debt → Higher investor confidence → Stronger currency.
Example:
If Country A has high debt levels and struggles to make repayments, investors might pull back. Conversely, Country B, with low debt and good financial discipline, would attract more investments, strengthening its currency.
How Do Exchange Rates Affect Your US Stock Investments?
If you invest in foreign markets, your investments could be affected by the ‘foreign exchange rates’. This is basically the impact of currency fluctuations on the total value of your investments abroad held in foreign currency.
Let’s say you want to invest in a US Stock from India. This is what the currency conversion process looks like when buying and selling a stock.
When you invest in US stocks from India, your journey involves three key stages where exchange rates come into play:
- Converting INR to USD
Before investing, you convert INR to USD (Dollar to rupee). The exchange rate at this point determines how many dollars you get for your rupees. A weaker rupee means you’ll need more INR for the same amount of USD. - Investing in US Stocks
Once converted, you use USD to buy US stocks. The stock’s performance dictates its value in USD, but your returns in INR will also depend on the exchange rate at the time of selling. - Converting USD Back to INR
When you sell your stocks, the proceeds are converted back to INR. The exchange rate on the sale date determines the final amount you receive.
Let’s understand the conversion process with an example.
Say you invested in Apple in April 2024. The share price of the company at that time was $170. The currency exchange rate in April 2024 was ₹83. Assuming you bought 1 share of Apple, it would cost you ₹14110 ($170 * ₹83).
Now in November 2024, the share price of Apple has grown by over 30%. The current share price of Apple is $225. You wish to sell your share and exchange it for INR. The current exchange rate is ₹84.
Your proceeds from sale of apple share and converting it in INR will be ₹21000 ($250 *₹84).
Positive & Negative Impact Of Currency Exchange Rate On US Investments
Currency fluctuates due to various reasons, and their impact on your portfolio depends on whether the local currency has weakened or is getting stronger. If the exchange rate for INR to USD rises from ₹70 to ₹75, it means that the Indian Rupee has weakened against the US Dollars. This is because we have to now pay 5 extra Indian Rupee to get 1 USD. Similarly, if the exchange rate drops from ₹80 to ₹75, it means that the Indian Rupee is getting stronger.
Now let’s understand the impact on your US investment when the currency rate appreciates and depreciates with 2 examples.
When INR Depreciates Against US Dollars
Let’s imagine that in April 2020, you decided to invest in Meta. Here’s how it all played out.
1. Initial Investment in Meta
You have an investment capital of ₹100,000. At this time, the exchange rate is ₹75 per USD and Meta’s stock price is $154
2. Converting INR to USD
To buy Meta shares, you first convert your ₹100,000 into Dollars. This means you have $1,333.33 to invest in Meta shares.
→ USD Investment = ₹100,000 / 75 = $1,333.33 (Rupee to dollar conversion)
3. Buying Meta Shares
With Meta’s stock price at $154, you buy 8.66 shares of Meta.
→ Shares Purchased = $1,333.33 / $154 = 8.66 shares
US Stocks allow you to buy shares in fraction. Learn more about fraction shares here.
4. Growth in Meta Stock Price
Fast forward to later in 2024, Meta’s share price has surged to $580. You decide it’s time to sell and capitalize on your gains.
→ Investment Value in USD = 8.66 shares × $580 = $5,022.80
5. Impact of Currency Exchange Rate
By the time you sell, the exchange rate has changed to ₹84 per USD. This weakening of the INR means each dollar you convert now gives you more rupees.
6. Convert Proceeds Back to INR
When you sell your shares and convert your proceeds back to INR, the value is:₹421,915.20
→ Total Value in INR = $5,022.80 × ₹84 = ₹421,915.20 (Dollar to rupee conversion)
7. Calculating Your Total Return
- Initial Investment: ₹100,000
- Final Value in INR: ₹421,915.20
- Total Return = (₹421,915.20 - ₹100,000) / ₹100,000 × 100% = 321.92%
Impact of Exchange Rate
The returns from the depreciation of INR against USD were 321.92% even though Meta’s share price itself had only increased by about 276.6%.
When INR Appreciates Against US Dollars
Considering a similar example, let’s say you invested in Netflix in April 2020. This is how it played out:
1. Initial Investment in Netflix
You had an investment capital of ₹100,000. At this time, the exchange rate was ₹76 per USD and Netflix’s stock price was $350.
2. Converting INR to USD
To buy Netflix shares, you first convert your ₹100,000 into USD:
→ USD Investment = ₹100,000 / $76 = $1315.79 (Rupee to dollar conversion)
This means you have $1315.79 to buy Netflix shares.
3. Buying Netflix Shares
With Netflix’s stock price at $350, you buy 3.76 shares.
→ Shares Purchased = $1315.79 / $350 = 3.76 shares
4. Growth in Netflix Stock Price
Fast forward to March 2021 and Netflix’s share price has surged to $512. You decide it’s time to sell and capitalise on your gains.
→ Investment Value in USD = 3.76 shares × $512 = $1925.12
5. Impact of Currency Exchange Rate
By the time you sell, the exchange rate has changed to ₹72 per USD. This strengthening of the INR means each dollar you convert now gives you less rupees.
6. Convert Proceeds Back to INR
When you sell your shares and convert your proceeds back to INR, the value is: ₹138,608.64
→ Total Value in INR = $1925.12 × ₹72 = ₹138,608.64 (Dollar to rupee conversion)
7. Calculating Your Total Return
- Initial Investment: ₹100,000
- Final Value in INR: ₹138,608.64
- Total Return = (₹138,608.64 - ₹100,000) / ₹100,000 × 100% = 38.61%
Impact: The returns from the appreciation of INR against USD were only 38.61%, even though Netflix’s share price itself had increased by a whopping 46.3%. So, an appreciation in INR can reduce your gains in local currency.
Exchange Rate Effects On Dividend Payments From US Stocks
An Indian investor earns dividends from US Stocks in the US. The currency exchange rates affect the value of these dividends upon conversion.
If the Indian Rupee is weakened, the investor will get more rupees for its dollars, however, if the INR has strengthened the investor stands at the risk of getting fewer rupees for its dollars.
Lets understand this with an example: Imagine you earned $120 dividends in March from your US stock investments.
In March, the exchange rate was ₹75 for 1 USD:
Your dividend value in March = $120 × ₹75 = ₹9,000
You decided to wait until the INR depreciates in value, so you can get more rupees for your dollars. Say in a couple of months the exchange rate changes to ₹80 for 1 USD (Rupee weakened):
Your dividend value = $120 × ₹80 = ₹9,600
➡ You GAIN ₹600 more due to the weaker rupee
Similarly had you waited or had withdrawn at a time where INR had appreciated. Assuming the strengthened INR rate to be 70 for 1 USD:
Your dividend value would be = $120 × ₹70 = ₹8,400
➡ You LOSE ₹600 because of the stronger rupee.
Important Questions and Answers About How do Currency Exchange Rates Impact Your US Stocks Investment
Do I need to convert rupees to dollars to invest in the US market?
Yes, to invest in the US market you first need to convert your Indian Rupee to Dollars.
Once you convert your rupees to dollars, your US Stocks account reflects the amount you have to invest in US Stocks in USD.How can I exchange rupees to dollars online?
You can exchange rupees to dollars easily on INDmoney, by simply adding funds from your Indian bank account. We’ve partnered with Axis, HDFC and Federal Bank to make this process seamless for you.
Even if you don’t have an account in the above banks, we take you through a small journey on our app itself to create a Federal Savings A/C. This ensures your investment journey in US Stocks is as efficient as possible. The bank will then convert your INR to USD based on the exchange rate on that day. Once this is done, your US Stock account on INDmoney will reflect your account balance in USD.
To understand the complete steps of transferring and converting money from your Indian bank to your US account, read this blog here.Do I need to pay taxes on returns because of dollar currency appreciation?
Yes, you need to pay taxes on currency appreciation if you realize or encash profits by selling. Let’s say, 6 months ago you invested $1000 in a US Stock. When you invested the currency exchange rate was ₹75. Which means you invested ₹75000 in INR.
Now, the exchange rate has changed to ₹78 for 1 USD and your US Stock value is constant at $1000. This means your returns will be $1000*78 =78000. In this case, you’ve gained ₹3000 because of dollar value appreciation against the rupee.
Hence, you are liable to pay capital gains tax on ₹3000 (78000-70000). Please note long term capital gains tax (12.5%) is applicable if you sell after holding the stock for two years and marginal tax rate (as per your income tax slab) is charged on short term capital gains which is if you sell before 2 years.
Do I need to pay a fee to exchange rupees to dollars?
When you convert Rupees (₹) to Dollars ($) for investing, you usually pay:
- Transaction Cost
- Platform Fee
- GST Charges
Transaction fees vary depending on the bank you use. INDmoney charges a 0.75% of the amount you convert or ₹750 whichever is lower as platform fee.
How can I exchange dollars to rupees after investing in the US market?
If you’ve invested in the US market on INDmoney, you can convert your dollars to rupees while withdrawing funds from your account. To withdraw money, you need to follow a few simple steps:
- Head to your US stocks account on INDmoney
- Click on ‘Manage’ tab and look for ‘Withdraw’ option
- Enter the amount you wish to withdraw and confirm
Your USD will be converted into INR and will be credited to your bank account within 3-5 days.
Who benefits from a weak currency?
A currency is termed as ‘weak’ when its currency is relatively lower than other countries. These exchange rates are typically moved by the supply and demand in the foreign exchange market. If the demand for a currency is up, its price also moves up. If the demand is less, the price moves down, hence making that currency's value lower or weaker than other countries' currencies.
Foreign investors looking to invest in countries where the price of goods and services is lower benefit from the weak currency of a particular country. This indicates they can get more currency of that country from the currency of its home country. Countries with weaker currencies, however, represent economic instability, higher inflation rates and more.What does depreciation of currency mean?
Depreciation of a currency means a decline in the value of that country’s currency in comparison to another country. For example if 1 USD = ₹70 and the currency exchange rate changes to ₹75. This indicates that you will now have to pay more rupee to get 1 USD, hence a decline in its value. This process of depreciation of a country's currency is also known as the weakening of currency.
What does appreciation of currency mean?
Appreciation of a currency means an increase in the value of that country’s currency. Taking an example: If 1 USD = ₹75 and the currency exchange rate changes to ₹70. The decline in price indicates that INR has strengthened in front of USD as now you have to pay ₹5 less to get 1 USD.
How often do exchange rates fluctuate?
Currencies are traded 24 hours a day. While local trading hours vary, currency is being traded across the world at times. Therefore currency exchange rates fluctuate constantly based on the foreign exchange market. A rising demand for a country's currency indicates that the price of that country’s currency will go up.
I’m earning dividends from US stocks. Should I convert these payouts back to my local currency, or keep them in USD?
If you’ve received Dividends from US Stocks, you can convert them by withdrawing it from your US Stocks account. Keeping them in USD would be beneficial when INR is appreciated in comparison to USD, since then you'd get less rupee for your dollars.
Let’s understand this with an example: Say you earned $25 in Dividends in October. In October the currency exchange rate is ₹80. Let’s take two scenarios and see how they play out:
1, You decide to convert your dividends in INR and earn ₹2000 (₹80 * $25).
2. You decide to wait, until USD strengthens in comparison to INR. Say in a couple of months currency exchange rate changes to ₹85. You now decide to withdraw and earn ₹2125 (₹85 * $25).
You earned 6.25% more dividends by simply waiting for USD to strengthen. That is the benefit of earning in exchange rate, since the impact of INR depreciating is significant and makes a big difference to your earnings.