GOI DESIGNATES FINANCE SECRETARY SUBBARAO AS NEW RBI

UNCLAS SECTION 01 OF 02 NEW DELHI 002356 SIPDIS SENSITIVE STATE FOR SCA/INS AND EEB USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD DEPT PASS TO USTR CLILIENFELD/AADLER/CHINCKLEY DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA MNUGENT TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN E.O. 12958: N/A TAGS: EAGR EAIR ECON ECPS EFIN EINV ENRG EPET ETRD BEXP KIPR, KWMN, PHUM, SENV, IN SUBJECT: GOI DESIGNATES FINANCE SECRETARY SUBBARAO AS NEW RBI GOVERNOR ¶1. (SBU) Summary: The government announced on September 1 that Finance Secretary Dr. Duvvuri Subbarao will be the new governor of the Reserve Bank of India (RBI),replacing Y.V. Reddy, whose five-year tenure ends on September 5. He has strong experience in public finance, including as Secretary at the Prime Minister's Economic Advisory Council and at the World Bank. Subbarao takes charge at a time when inflation is running high, the economy is showing signs of slowing under tight monetary policy, and the rupee is weakening. Subbarao is seen as a reformer, although some in Mumbai's financial community showed ambivalence about his appointment. End Summary. BACKGROUND OF DR SUBBARAO -------------- ¶2. (SBU) The government has designated the current Finance Secretary Dr. Duvvuri Subbarao as the new Governor of the Reserve Bank of India (RBI),replacing Y.V. Reddy, whose five year term ends on September 5. Subbarao's appointment initially will be for a period of three years, but could be extended for another two years, as the RBI Act provides for appointment of a governor for up to five years. Rakesh Mohan, the present Deputy Governor who was a strong contender for the post, reportedly has been shortlisted for the job of India's Executive Director to the World Bank. ¶3. (U) Subbarao, 59 years old, has been Finance Secretary since July 2007, as well as Secretary at the Department of Economic Affairs since May 2007. Subbarao has extensive public finance policy experience and has held important posts in this area, including Secretary of the Prime Minister's Economic Advisory Council. During the years 1998-2004, he was a lead economist with the World Bank and worked on issues of public finance for the countries of Africa and East Asia. He also worked as Joint Secretary in the Department of Economic Affairs during the first phase of reforms in the 1990s under Manmohan Singh as Finance Minister. As Finance Secretary for Andhra Pradesh, Subbarao initiated fiscal reforms in the state between the years 1983-1988. ¶4. (U) An alumni of the prestigious Indian Institute of Technology of Kanpur, Subbarao received the top score in the Indian Administrative Service exam in 1972. He did his MS in Economics from Ohio State University in 1978 and was a Humphrey Fellow at the Massachusetts Institute of Technology during 1982-83. He holds a Ph.D degree in Economics from Andhra Pradesh University. ¶5. (U) Subbarao's appointment comes at a time when the economic situation of the country is challenging, with moderating growth, 16-year high inflation, and a weakening rupee in the wake of a growing trade deficit and a net outflow of portfolio investment. He has stated previously that RBI has to be at the forefront in inflation management. One of Subbarao's first tasks will be preparing the quarterly monetary policy review scheduled for the end of October. He also takes the helm shortly before the RBI and the government begin to review the 2009 Banking Roadmap. The Roadmap is expected to include consideration of several financial sector reforms, such as the opening of the banking sector to foreign banks, approval of fresh bank licenses, restructuring the RBI itself, and efforts to make India a hub of international financial services. Over the next three years, his biggest challenge will be to provide an environment and a regulatory framework that encourages and facilitates India's globalization. ¶6. (SBU) In Mumbai, market players expressed ambivalence at the selection as Subbarao as the next RBI governor, largely because he is seen as the Finance Ministry's man from New Delhi. In previous conversations about potential RBI governors, market players have consistently told Congenoffs that they would have preferred Ahluwalia as RBI governor, and would have accepted the current Deputy RBI Governor Rakesh Mohan, a well-known local entity; Subbarao came in a distant third. Ashok Wadhya, CEO of Ambit Capital, told Congenoffs, "He's a true bureaucrat. I've worked with Subbarao in the Finance Ministry and his ability to make decisions is questionable. While I disagreed with Reddy, at least he made decisions." Tushar Poddar, Chief Economist of Goldman Sachs, told Congenoffs that while Subbarao has a wealth of experience and is known to be a good administrator, he is an outsider to RBI and will NEW DELHI 00002356 002 OF 002 have to establish his credentials in the markets, in which he has little experience. Poddar said that while Subbarao will hopefully be a better communicator than Reddy, he "won't hold his breath" on whether Subbarao will pick up the much-needed reform agenda. Other interlocutors predicted that Subbarao would likely "drive the government's agenda," including focusing on inflation instead of growth. Comment -------------- ¶7. (SBU) Dr. Subbarao has a strong reputation as an economist and brings a professional and balanced approach. The RBI's governor's job is the second most important job in India's financial hierarchy after the Finance Minister. Subbarao is reportedly a favorite of Finance Minister Chidambaram. His long-standing relationship with Prime Minister Singh might have also helped him in getting this position, possibly feeding into Mumbai's perception of Subbarao as Delhi's man. ¶8. (SBU) Since the outgoing RBI Governor, YV Reddy, was a slow and cautious liberalizer, maintaining tight constraints on foreign financial institutions, many wonder if Subbarao will be an improvement over his predecessor in this area. While Embassy officers have found Finance Secretary Subbarao to be accessible, forthright and receptive to economic and financial issues of concern to the US, it is difficult to extrapolate that behavior to his new post as RBI Governor. The arguably autonomous position of RBI Governor offers Subbarao a new professional and policy-making independence - and perhaps a new perspective as well. Since central bank governors, like technocrats in Indian public service, are more criticized for failure than praised for success, however, the bureaucrat in him may find an aversion to risk (read reform). It is useful to recall that Reddy was also heralded as a reformer, with an IAS career similar to Subbarao's, when Reddy took office five years ago. Mission India will reach out to him in the early weeks of his tenure, but will also watch closely to see what kind of Governor Subbarao reveals himself to be. End Comment. ¶9. (U) Consulate Mumbai contributed to this cable. MULFORD