Only six months ago, the mood was one of great confidence and celebration. George Soros was investing heavily into India, putting money into both sides of the Ambani divide and then some more. The Arabs were supposed to pour money into India to diversify their asset base. The Indian corporate sector was borrowing, taking over companies globally (there were hardly any local takeovers – everybody was a buyer) and planning large expansions. But six months later, 11% inflation and the relentless rise in oil prices have exposed the vulnerability of India. Fiscal deficit is shooting up, interest rates are rising and cost increases of various items are feeding into each other in an upward spiral.

Is this just the beginning of tough times? For the corporate sector, yes. The excesses of a bull market take a long time to be purged. Correction of stock prices is just one kind of rectification. Indeed, it brings in its wake other problems. For instance, according to some estimates, Indian companies have foreign currency convertible bonds (FCCBs) of $25 billion outstanding. FCCBs are debt which gets converted into equity if the share prices go above a certain level. Those levels are distant now – given the condition of the market and the global economy, 2008 looks like a washout. This means that FCCBs will start becoming actual debt. Companies that have unconverted FCCBs issued from early 2007 onwards are in danger of having to start paying interest on them. The silver lining is that they would not be tempted to borrow more and, indeed, would want to cut down on debt. We are just at the beginning of a process of adjustment.