While the policy makers around the world grapple with the possibility of another financial crisis, how should investors in India prepare for the same? There are two ways to look at this. The first would be the impact on the stock market. The second would be the impact on business fundamentals. Big moves in India's market are triggered by FIIs and they will surely head for the exit at the slightest sign of trouble. This would no doubt cause a correction in the markets, perhaps even a big one in the event of another global financial crisis. But what would happen to the fundamentals of corporate India? We believe there are reasons to be cautious.
India is no longer a closed economy. As India continues to integrate with the world, corporates will be exposed to ever increasing risks. One of the biggest is the risk of high foreign debt. Borrowing in foreign currency is risky even for exporting firms that have a natural hedge. However, as the chart shows, India Inc has thrown caution to the wind. Foreign debt has grown at 15.6% CAGR over the last 6 years, far higher than India's GDP growth. At the end of 1HFY15, the foreign debt burden stood at US$ 161 bn. Many corporates have not hedged this exposure due to the recent stability in the currency. Investors should be aware that if the Rupee were to depreciate in the event of a financial crisis, India Inc would be caught on the wrong foot.