India: Where There's Smoke ...There's Fire!

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At the risk of sounding like a broken record or The Motley Fool's resident curmudgeon, international worries are once again threatening to halt the U.S. stock market in its tracks.

I've mentioned numerous times that the debt crisis in Europe was a problem too easily forgotten; unfortunately, sweeping it under the rug only means a potentially bigger problem down the road. Last week, China's first quarterly trade deficit in seven years caught the market off guard and stymied any immediate hope that China would float its artificially low-priced currency, the yuan. Now India, a country that boasts the 10th highest nominal GDP in the world, warns us that rising oil prices and crippling inflation may hamper its growth.

You might be rolling your eyes at that last one or take it with a grain of salt, but the health of India has now become paramount to the U.S., which is one of its largest trading partners.

As reported this weekend, India's March inflation rate skyrocketed to 8.98% while core inflation -- a measure that excludes volatile food and energy prices -- jumped to a staggering 7.1%. If that wasn't bad enough, January's inflation figures were revised up from a previous report of 8.23% to 9.35%. It seems an almost foregone conclusion that the Reserve Bank of India will soon attempt to control inflationary pressures by raising interest rates by 25 or perhaps even 50 basis points. 

With the cost of borrowing money rising, some of India's largest sectors could feel an almost immediate pinch. India's information technology sector, which accounts for more than 7% of India's GDP, could see rapidly dwindling growth expectations. Infosys Technologies (Nasdaq: INFY  ) dove last week after reporting weaker-than-anticipated growth. This earnings report now casts a cloud over the entire IT sector, which also includes powerhouses Wipro (NYSE: WIT  ) and Cognizant Technology Solutions (Nasdaq: CTSH  ) .

But don't think just the IT sector could be in line for a slowdown. India's automotive sector could be crippled by a double-edged sword. India's auto giant Tata Motors (NYSE: TTM  ) is battling rapidly rising oil prices and a swift march higher in India's interest rates. Both have the potential to put a major dent in Tata's sales figures.

Even India's banks face the significant reality of a slowdown in growth. Rising interest rates will indeed mean more net interest income, but that income comes with a price -- a reduction in the amount of loans being originated. India's largest banks HDFC (NYSE: HDB  ) and ICICI (NYSE: IBN  ) could find themselves holding the short end of the stick if rates keep rising.

Until recently, India's GDP growth had outpaced most of the world, allowing many of its largest publicly traded companies to trade at reasonably aggressive forward earnings multiples. But with the real fear of monetary tightening strangling the momentum out of India's economy, don't be surprised to see weakness in these India-based securities. Where there is smoke, there's usually fire. It pays to keep a close eye on India going forward.

How important is India to your investment strategy? Share your thoughts in the comments section below and consider tracking these as well as your own personalized portfolio of stocks with My Watchlist.

Add Infosys Technologies, Wipro, Cognizant Technology Solutions, Tata Motors, HDFC and ICICI to My Watchlist.

Also, feel free to get your copy of our latest free report, 3 Stocks for $100 Oil.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He would like to remind you not to forget about our friends in Japan who could still use a helping hand. You can follow him on CAPS under the screen name TMFUltraLong. HDFC Bank is a Motley Fool Global Gains choice. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that requires no monetary oversight.

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