The weakening of the Indian rupee against the US dollar has caused concerns among students studying abroad. The rupee volatility is impacting students, both existing and aspirants planning to go abroad for education. Apart from tuition fees, students also spend money on their living expenses, and the currency volatility often messes up their entire budget. Here’s what one can do to manage and protect oneself from currency volatility.
Purchase foreign currency-denominated prepaid cards
Hedging foreign currency is best handled by purchasing foreign currency denominated prepaid cards, i.e., forex cards, when students are traveling. A forex card is like a near-term forward contract with zero premium. It can be loaded in one or more foreign currencies and used to transact or make payments hassle-free.
In functionality, a forex card works like any other debit or credit card. However, they are pre-loaded with foreign currency at a specific rate that is agreed upon by you so that the rate won’t fluctuate as per the current currency rates. It eliminates the rate volatility part, unlike rupee-denominated cards where customers cannot be aware of the rate at which INR would be converted into a foreign currency when spending at a merchant location.
Hence, if you are traveling and looking to manage your day-to-day living expenses, buying currency on a forex card is wise as you’ll never risk losing your money due to rate volatility apart from currency conversion charges. Once you have loaded the currency in the forex card, it will be valid for 3-5 years depending on the validity of the card you’ve purchased.
Use the Rate Lock-in facility to get the best rates
If you are planning to purchase a forex card for travel or transfer your tuition fees to your university within a few days, you need to keep a keen eye on the currency exchange rates. It becomes even more important in current times when the currency rates are highly volatile. A few FinTechs are providing 24X7 booking and rate lock-in facility that you can use to your advantage. Book the rates when they look desirable to you. The rate lock-in facility will help you get the best forex rates within a specific window.
Use forward contracts to hedge rates on money transfers
Forward contracts are the best instruments if you want to hedge against uncertainty in the future. Money transfers are usually high-value transactions, especially those for student fees, etc. One can hedge foreign currency rates by booking a forward contract and protect themselves against rate volatility. A forward contract is an arrangement with the bank that allows you to transfer money at a specific date in the future (up to 12 months) at an exchange rate that is agreed upon today.
Hence, with a forward contract, you know what the exchange rate will be when the transaction takes place. However, forward contracts come with some premiums which depend on their duration; hence you must analyse the premium offered by your bank. Also, calculate the interest income gained by keeping INR in the Bank Vs. Cost of the forward contract and take a decision accordingly. The forward contracts can be booked by the banks. You can get in touch with your own bank and find out the premium on forward contracts.
Open an overseas account
It is also possible to open a foreign currency account in the currency of payment. Therefore, foreign currency rates on the date when such accounts are opened would be the hedged rates. Identification like a passport, visa, student ID card, address proof, etc., is required to open an account, and most universities have a tie-up with a local bank for student’s account opening. However, one must understand that foreign currency deposits offer nearly no interest income.
Students can hedge the currency fall by carefully considering various options and choosing the right instrument considering their budget constraints, date of travel and duration of their stay abroad.
The author is Founder & CEO, BookMyForex.com