Protect your portfolio: How US stocks can shield against currency depreciation

Currency depreciation can have a significant impact on your investments. When the value of your local currency declines against stronger currencies, the value of assets and returns can be eroded, leaving investors vulnerable. For Indian investors, the recent depreciation of the rupee against the US dollar has emphasized the need for diversification into global markets. One powerful strategy to protect your portfolio is by investing in US stocks.

In this blog, we'll explore how US stocks can serve as a shield against currency depreciation, enhance your returns, and offer valuable diversification opportunities.

Understanding currency depreciation

Currency depreciation refers to the decline in the value of a currency relative to other currencies. This usually happens when a country’s economy is facing difficulties or when there is a weaker demand for its currency on international markets. For instance, if the Indian rupee depreciates against the US dollar, it takes more rupees to buy one US dollar.

While currency depreciation can affect everyday transactions, like imports and inflation, it also has a direct impact on investments. Let’s break it down:

Impact on local investments

When the local currency weakens, companies that rely on imports (e.g., fuel, machinery, and technology) face higher costs. This often results in reduced profit margins, which can, in turn, depress stock prices in industries like oil and gas or capital-intensive sectors.

For example, if an Indian company imports raw materials from the US, a weaker rupee will increase the cost of those materials, potentially reducing the company’s profitability and stock value.

Impact on international investments

On the flip side, international investments in stronger currencies, such as the US dollar, can actually benefit from currency depreciation. As the value of the local currency drops, investments denominated in stronger currencies appreciate in value when converted back into the local currency.

For example, let’s say you invested ₹1 lakh in both Indian and US stocks, both of which yield a 20% return. Your Indian stock will grow to ₹1.2 lakh. But the US stock, benefiting from a stronger US dollar, could grow to ₹1.25 lakh—an extra ₹5,000 due to currency effects.

Benefits of investing in US stocks

Investing in US stocks is a strategic move, especially during periods of rupee depreciation. Here's why:

1. Benefit from dollar appreciation

The US dollar is known as a “safe haven” currency, often strengthening during global economic uncertainty. When you invest in US stocks, their value increases not only because of the companies' market performance but also due to the rising value of the US dollar. This dual benefit—growth from both market performance and currency appreciation—makes US stocks an attractive investment during periods of rupee depreciation.

2. Access to global market leaders

The US stock market provides exposure to leading global companies, particularly in sectors like technology, healthcare, and energy. These industries are often underrepresented in Indian markets. Iconic companies like Apple, Microsoft, and Tesla dominate these sectors and present growth opportunities that simply aren't available in domestic markets.

Additionally, many of these US-based companies have a global footprint, benefiting from international demand and growth, which can translate into higher returns for investors.

3. Historical outperformance

Looking at historical data, US stock indices such as the S&P 500 have consistently outperformed Indian stock indices, including the NIFTY 50. Over the past year, the S&P 500 saw returns of nearly 25%, while the NIFTY 50 managed modest gains of 5-6%. When factoring in the depreciation of the rupee, the return on US stocks could exceed that of Indian stocks by 4-5% for Indian investors holding dollar-denominated assets.

This outperformance illustrates how investing in US stocks can be an effective way to enhance returns, particularly during periods of currency depreciation.

An example: Indian investors’ gains from US stocks

To understand the impact more clearly, let’s take an example from 2024-2025:

During this period, the Indian rupee depreciated by 3.5% against the US dollar. An investor holding US stocks during this time saw an additional return of around 4%, purely due to currency movements. In other words, the appreciation of the US dollar helped boost returns for Indian investors beyond the performance of the underlying stocks themselves.

This example highlights how US stock investments not only provide exposure to global markets but also act as a natural hedge against rupee depreciation, thereby boosting returns.

Strategies for managing currency risks

While investing in US stocks can protect your portfolio from currency depreciation, there are additional strategies you can implement to manage currency risk effectively:

1. Currency hedging tools

• Currency ETFs: Currency exchange-traded funds (ETFs) track currency movements and can help offset the impact of unfavorable exchange rates. By investing in these funds, you can mitigate some of the losses from currency depreciation.
• Forward contracts: These are agreements to lock in exchange rates for future transactions. While this can reduce uncertainty, forward contracts come with costs and require careful planning.
• Options contracts: These provide the flexibility to hedge against adverse currency movements while still allowing for potential upside.

2. Geographic diversification

Spreading your investments across multiple countries and regions reduces your reliance on any single currency or economy. For example, you can diversify your portfolio with investments in Europe or Japan, in addition to US stocks. Emerging markets can also provide higher growth potential, which can further reduce the risks posed by currency fluctuations.

3. Sector-specific diversification

Diversifying within sectors is just as important as geographic diversification. Not all sectors are equally affected by currency movements. For instance, pairing tech-heavy US investments with more stable sectors like healthcare or utilities can help smooth out volatility. Additionally, Indian export-oriented companies (e.g., IT and pharmaceuticals) can benefit from a weaker rupee, providing a natural counterbalance to your portfolio.

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Investing in US stocks offers a powerful way to protect your portfolio from the negative effects of currency depreciation, particularly during times when the rupee weakens against the US dollar. The combination of dollar appreciation and access to global market leaders provides a strong foundation for long-term growth and diversification.

However, to truly safeguard your investments, it's important to maintain a diversified portfolio. By incorporating US stocks into your investment strategy, alongside local assets and currency hedging tools, you can shield your portfolio from currency risks while enhancing returns.

Contributed by Denila Lobo

Denila is a content writer at Winvesta. She crafts clear, concise content on international payments, helping freelancers and businesses easily navigate global financial solutions.