RBI GOVERNOR SUBBARAO DISCUSSES THE INDIAN ECONOMY IN THE

UNCLAS SECTION 01 OF 02 MUMBAI 000588

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TAGS: EFIN ECON ETRD EINV IN
SUBJECT: RBI GOVERNOR SUBBARAO DISCUSSES THE INDIAN ECONOMY IN THE
WAKE OF THE GLOBAL FINANCIAL CRISIS

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1. (SBU) Summary. Speaking on a wide range of subjects,
Reserve Bank of India (RBI) Governor Duvvuri Subbarao told the
Consul General that he thought the global financial crisis would
only slightly derail the high growth trajectory of the Indian
economy. Acknowledging the problems in the Indian economy, he
noted that credit conditions were tight, risk aversion was up,
and inflation was still high. In addition, he expected that the
RBI's monetary stimulus that would start to work after a normal
time lag, and that foreign capital would begin to return to
India. Speaking of the recent appreciation of the rupee from
near all-time lows, he thought that the two-way movement of the
currency was comforting. The Governor promised to look into
U.S. Ex-Im Bank's Indian Infrastructure Facility proposal, and
affirmed his commitment to review the state of the banking
roadmap in 2009. End Summary.

Governor Reviews State of the Economy
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2. (SBU) Reserve Bank of India (RBI) Governor Duvvuri Subbarao
informed visiting Consul General and Congenoffs that he hoped
that the Indian economy would quickly return to 8.5 percent GDP
growth rates. He saw the financial crisis as only slightly
derailing India's high-growth trajectory. He noted that a
visiting International Monetary Fund (IMF) assessment team had
projected that growth would decrease to 6.5 percent this year,
and 5.8 percent in 2009. Subbarao did not challenge these
projections, but stated that 8.5 percent GDP growth was required
to halve poverty levels in a decade.


3. (SBU) Speaking directly about the financial crisis, Subbarao
asserted that India had no direct exposure to sub-prime loans.
Nevertheless, the effects of the crisis were being transmitted
to India through the "financial, monetary, real, and confidence
channels." In the financial channel, Indian corporations and
banks have struggled to raise money overseas in recent months,
increasingly credit demand in India. This borrowing has made it
more difficult for Non-Bank Financial Companies (NBFCs) and
mutual funds to raise money domestically. The main "hiccup"
now, he said, was the crisis in confidence, which he believed to
be "temporary and shallow." Demand for credit, risk aversion,
and the cost of funds had all increased in the current
environment. He stated that inflation was still high, at eight
percent, which made it difficult to lower deposit rates. He
explained that Indian banks wished to lower deposit rates, but
feared savers would move money to other outlets and savings
programs if rates were lowered any more. He added that as the
crisis deepens in the developed world, the effect on India could
worsen.

Monetary Stimulus Will Work After a Normal Delay
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4. (SBU) Describing the RBI's response to recent financial
events, Subbarao explained that the central bank had increased
liquidity "beyond comfort levels" to ensure banks had enough
money to lend. Noting that monetary policy signals in
developing countries took longer to impact the economy than
signals in developed countries, he acknowledged that the real
economy in India had not felt the effects of the monetary
stimulus due to the time lag.

Rupee's Two-Way Movement Is "Comforting"
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5. (SBU) After several months of depreciation, the RBI Governor
described the "two-way movement" of the rupee as "comforting."
He believed the appreciation was due to the downward movement of
the dollar, rather than a strengthening rupee. He reminded the
Consul General that global risk aversion had caused the dollar
to appreciate, as investors sought safety. However, investors
now appeared concerned about the U.S. economy, where the
uncertain impact of the fiscal stimulus and problems in the auto
industry had changed investor sentiment. He said the RBI "takes
no position" on the rupee's value, and works only to "smooth"
the direction of the currency. He informed the Consul General
that exporters would normally be happy with a weak rupee, but so
many had hedged their dollar exposures earlier this year at
Rupees 40 to a dollar that they were taking losses because of
the depreciation.

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Trade Finance Constraints are Not as Bad as Thought
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6. (SBU) Subbarao stated that the RBI was aware of constraints
in obtaining trade finance. The central bank's research shows
that the stock of trade finance is down and the cost of such
finance is rising. However, he cautioned that the problem is
not as bad as many thought. He added that he did not know of
specific companies having problems in obtaining trade finance.

U.S. Export-Import Bank and External Commercial Borrowing
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7. (SBU) The Consul General briefed Subbarao on the U.S.
Export-Import Bank's (Ex-Im) India Infrastructure Facility
(IIF),and the proposal for Indian banks to co-guarantee loans
to Indian borrowers. Subbarao responded that he did not know
the specific problems with the Ex-Im facility. He explained
that RBI policy is that foreign lenders should take the full
risk of the loan to an Indian borrower without the
intermediation of an Indian bank. However, noting the Indian
government's prioritization of the infrastructure sector, he
promised to look into this issue. Subbarao also promised to
examine the case of the Bhopal Medical College Private Ltd.,
whose application for a loan from Ex-Im still awaited approval.
(Note: The Consul General provided Subbarao with a four-page
briefing note about the IIF. End Note.)


8. (SBU) Speaking more generally about External Commercial
Borrowing (ECB),Subbarao stated that he wanted more ECBs and
Non-Resident Indian (NRI) money to come, but he had not seen any
sign that this was happening. He opined that once things calm
down globally, India will again be a good destination for
foreign capital. He added that he did not believe the central
bank had liberalized ECB policy too much.

Global Events Delaying Banking Roadmap
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9. (SBU) On the topic of India's banking roadmap, the Governor
said he was "deeply conscious" of the government's promise to
review the banking sector in 2009. He had started thinking
about it the day that he took office, but his focus was diverted
by global financial events, such as the troubles at Freddie Mac
and Fannie Mae that started to affect global credit markets. As
a result, the issue has remained at the back of his mind, though
he acknowledged the importance of the subject.

Mumbai Will Bounce Back Quickly after Terrorist Attacks
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10. (SBU) Turning his attention to Mumbai's future after the
recent terrorist attacks, the central bank governor thought the
city would bounce back quickly like New York City after the
attacks of Sept. 11, 2001. He opined that people in Mumbai must
return to normal quickly, as they cannot survive financially if
they stay home. According to Subbarao, the attacks will only
have a limited impact on economic activity.
SIMMONS