>Debt: No Immediate Concerns But No Complacency Either (CITI)

■ Overall Debt/GDP is high at 143%... — With problems in the EU bringing to the fore issues regarding deficits and debt, India is once again on the radar given its twin deficits and high levels of debt. Despite high deficits, strong growth has resulted in India’s public debt/GDP ratios coming off from the 86% levels in FY05 to 76% levels currently. In contrast, private debt (household and corporate) has risen from 32.5% of GDP in FY00 to 66.2% in FY10.

■ …but deficits are manageable and the banking system is healthy — On the public side, as is known: (1) India funds its deficit through domestic sources and has a large captive demand for bonds, and (2) Growth and rate dynamics give it more flexibility in running deficits without a rise in debt/GDP ratios. As regards private debt: (1) Besides being largely domestic, loan to deposit ratios are 71%, (2) Reserve requirements are high. While external debt has risen, FX reserves currently stand at 5.5x short-term debt/amortizations.

■ No room for complacency, now is the time for further reform — India remains vulnerable to a sudden weakening of nominal GDP growth, which could result in a rise in debt ratios unless underlying government deficit is reduced. We thus believe: (1) adhering to timelines on proposed fiscal legislation (13th FC; GST, DTT), and (2) proposals to reduce subsidies both on oil and fertilizers, are key. To this end, the recent approval of the APM gas price hike is positive.

■ Incremental data is positive — (1) Growth: While the base effect will likely result in a moderation in monthly numbers, growth is now more broad-based, (2) Inflation appears to have peaked with lower commodity prices an added boon, and (3) Deficit could come in lower due to higher telecom revenues.

■ EU impact on financial markets — While we continue to expect gradual medium-term appreciation based on robust growth, strong capital inflows and ongoing monetary policy tightening, we have moderated the pace of INR appreciation. Although the odds of an inter policy hike have fallen, we maintain our call of a +75bp hike in 2010 as India’s growth/inflation dynamics are domestic-driven.

To read the full report: INDIA MACROSCOPE