>India Equity Strategy(CITI)

Easy foreign money (part of the India story so far) no more — India has been a big
beneficiary of freely flowing foreign capital. In FY08 the flow was equivalent to
26% of domestic savings and almost 25% of gross capital formation – accelerating
India’s economic growth. The capital inflow scenario has changed for now, and
probably the medium-term, which will have implications for growth, interest rates,
corporate balance sheet risks, and leverage.

1 Debt rather than equity flows could be the bigger issue — Debt inflows have
exceeded equity inflows (1.2x), growing more rapidly (2.1x, over 2 years) and
accessed by more sectors. We believe debt flows, and the outlook, would have
greater implications for the economy than would equity flows (US–$12b YTD, the
market’s focus). Debt inflow-outflow cycles are usually longer than equity ones,
and could have more meaningful medium-term implications.

2 Foreign debt skewed toward long end; chunky trade credits near-term pressure —
Corporate India’s FX loans are predominantly long-term (by regulation), so
medium-term global (rather than short-term) credit trends will determine
availability and price. However, chunky short-term trade credits ($40b+) appear to
be facing some refinancing, and significant pricing, pressures. This is straining
corporates, banks and the currency, and is a near-term issue.

3 Overall corporate leverage OK, FX share less so, and there are skews and risks —
India’s corporate sector leverage is fairly modest (24%). Its foreign debt share,
however, is 34%. With incremental FX debt rising (46%), credit spreads hurting
(400-800bps, from 50-150bps in Jan), and sectors and companies differently
exposed, we detail corporate macro and micro FX and leverage issues.

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