Globalization is accelerating the process of integration of Indian markets with international markets and liberalization is leading to increasing role of markets in deciding the prices, exposing all transactions in an economy to risks such as forex, interest rate and prices. This enables those with information on the impact of such risks and those with better incomes to face such risks, putting them at a more advantageous position compared to those unaware or negligent of the same. This has also led to significant innovation of futures exchanges in the developed economies to share such risks among the haves and have nots of information and capital. Domestically, the rapid rise in India Inc.'s exposure to global markets is inexplicable due to the strong growth in the total merchandise trade, which has increased by over 24% to $235 bn in April-December 2006, over the corresponding period a year ago, in line with India's growth in intellectual capital and liberalized trade policies. The inclusion of services, transfers and other income puts the figure at a whopping $404 bn for FY2005-06. It is not only these companies in the process of exports and imports of goods and services, but also the banks which provide credit facilities to such firms that face similar risk apart from the credit default risk (a derived risk from all the risks mentioned above), which is faced by the banks alone.

The risk arising from volatility in foreign exchange rate movements remains significant for the exporters and importers of goods and services. The average annualized foreign exchange volatility of 6% works out to Rs. 24 bn worth of forex risk that India Inc. is exposed to, given its total earnings. Added to this, the price variation in commodity prices enhances the risk exposure of corporate India and thus has an adverse impact on profits and losses accounts of various firms. Of late, the exposure to forex risk of India Inc. has also amplified, as the value of Indian rupee against benchmark foreign currencies has become highly volatile.

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