Re gaining currency

For a change, Indian rupee is on a strong footing now. The country’s currency was on a downward spiral for quite some time. Gradually shedding that weakness in recent months, it rose to a two-year high on Wednesday and breached the 64-level to close at 63.70 against US dollar. In the process, it surged 37 paise – the best single-day show this year. The currency continued its strong run on Thursday too, ending the day at 63.69 vs $.

There are several domestic and global factors that put our currency on a stronger pedestal. With country’s macroeconomic indicators improving and tax reforms like GST firmly in place, foreign institutional investors are pouring funds into the Indian market. They invested $8.75 billion into equity markets and another $18 billion into bond markets so far, this year.

This aside, US dollar showed weakness against several major global currencies. That also helped rupee’s cause. Interestingly, the domestic currency strengthened to the 2-year high on a day when RBI reduced key lending rate by 25 basis point on Wednesday.

Normally, rupee falls whenever RBI goes for a rate cut as foreign investors try to pull out money from the domestic market because rate cut will reduce interest rate differential between India and other countries. That was not the case this time, indicating the rupee’s inherent strength. It gained 6.64 per cent against $ this year.

But a stronger rupee obviously brings bad tidings to the Indian companies that export their products and services. However, it’s time for such companies to realise that they can no longer piggyback on the cheaper currency to make a profitable living. What they need to do is innovate, innovate and innovate.

That way, they can greatly reduce the cost of production and make their products competitive in the global markets, leading to increase in exports. The other thing which many Indian export companies lack is economies of scale. That obviously is possible for large companies, though.

In India, some corporates like Reliance Industries emulated this concept to the hilt and derived success in most of business verticals they entered. However, many Indian companies, both small and big, can learn a lesson or two from their Chinese counterparts which mastered the art of manufacturing on a massive scale, thereby churning out products dirt cheap.

In the case of small companies which can’t afford large production capacity, the central government should offer incentives liberally. But there is no point in turning the currency cheaper to enable products from such companies to compete in global markets. A strong currency is essential for the stronger and solid growth of any country. It is also imperative for eliminating poverty at a faster pace.

Developed countries rarely meddle with their currencies to achieve economic goals. Instead, they focus on innovation and inventions. That’s the reason why they continue to dominate the global economic scene. It’s high time India also focussed on innovation and research instead of relying on cheaper currency for short-term forex gains through exports and NRI inflows. Hope India also emulates them. Time to celebrate the stronger rupee even if it is short-lived, isn’t it?