Investors are often enamoured by returns in emerging markets. These investors often see the huge growth potential but do not account for currency fluctuations because of deficits, monetary policies and other factors. To demonstrate the impact of currency movements on returns, Raltin analysts compared India’s NSE Nifty Index to the S&P 500 in local currency after adjusting for US Dollar to Indian Rupee currency fluctuations.
As the below chart shows, from June 2014 to Nov 2018, the S&P 500 grew by 36.79% (CAGR of 7.07%) compared to the NSE Nifty at 47.91% (8.93% CAGR). However, when you adjust for the depreciation of the Indian Rupee from 59 INR per Dollar in June 2014 to 70 INR per Dollar in Nov 2018 (a nearly 20% decline), the dollar adjusted returns for the NSE becomes 27.33% from the June 2014 to Nov 2018 time period (CAGR of 5.45%). This CAGR is smaller than S&P 500 return of 7.07%.