MUMBAI MASALA: 2003 MUMBAI BOMBINGS, RBI KEEPS INTEREST

UNCLAS SECTION 01 OF 03 MUMBAI 000316

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EINV EFIN ECON PHUM KDEM KWMN PTER IN
SUBJECT: MUMBAI MASALA: 2003 MUMBAI BOMBINGS, RBI KEEPS INTEREST
RATES ON HOLD, OFFICE DEPOT, AND TRAFFICKING BUST

REF: 09 MUMBAI 305

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1. (U) Table of Contents:





- Three Convicted for 2003 Mumbai Bombings



- RBI Keeps Interest Rates on Hold, Expresses Concerns Over
Inflation



- Successful Trafficking Bust By Navi Mumbai Police



- Global Office Equipment Supplier Office Depot Thinks Big But
Will Tread Cautiously in India







Three Convicted For 2003 Mumbai Bombings

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2. (U) On July 27, a special court convicted three people, Hanif
Syed, his wife Fehmida, and Ashrat Ansari, of planting bombs
that killed 52 people in Mumbai in 2003. The court, convened to
hear cases under the Prevention of Terrorism Act (POTA),found
the three guilty of planting RDX-laden bombs at the Gateway of
India (a tourist destination) and Zaveri Bazar (the diamond
market). According to the prosecutor, the plot was originated
in Dubai by a group calling itself the Gujarat Muslim Revenge
Force and claimed that the bombings were retaliation for the
2002 Gujarat riots that killed hundreds of Muslims. The
prosecution built its case on the testimony of a taxi driver who
unwittingly ferried the bombs to the Gateway, and miraculously
survived, and an alleged co-conspirator who turned state's
witness. The convicted bombers will appeal their case to the
Mumbai High Court.



RBI Keeps Interest Rates on Hold, Expresses Concerns Over
Inflation

--------------




3. (U) On July 27, in its first quarter review of monetary
policy, India's central bank, the Reserve Bank of India (RBI),
did not change any key interest rates, which was in line with
market expectations. Since October 2008, RBI has reduced the
cash reserve ratio (CRR),the percentage of deposits which must
be kept with RBI, by a cumulative 400 basis points to 5.0
percent. The RBI has also reduced the repo rate, the interest
rate at which RBI lends to banks, by 425 basis points to 4.75
percent, and has reduced the reverse repo rate, the interest
rate RBI pays to banks for funds deposited with it, by 275 basis
points to 3.25 percent. (Note: 100 basis points is the
equivalent of 1 percent.) Economic observers agree that these
moves have increased liquidity in the Indian banking system,
especially after credit lines dried up during in the aftermath
of the collapse of Lehman Brothers in September 2008, when the
global financial crisis first reached India's shores.




4. (U) For the current fiscal year 2009-10, RBI left its GDP
growth forecast unchanged at 6 percent. Furthermore, the
central bank also stated that growth forecasts are more likely
to be revised upwards than downwards. However, RBI also
increased the inflation estimate to 5 percent from the earlier 4
percent estimate; it also stated that inflation could rise
beyond these estimates, should GDP growth also increase. In

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addition, though the RBI reiterated that it will maintain an
"accommodative stance" until there are "robust signs of
recovery," it also indicated that it was formulating an exit
strategy to reverse the expansionary measures it undertook
during the height of the financial crisis in order to stave off
the threat of inflation.




5. (U) The RBI's monetary policy statement also listed what it
believed to be the five biggest challenges faced by the Indian
economy. The bank stated that the first and most immediate
challenge is to maintain a balance between the need for ample
liquidity in the system to ensure that credit lines are
available, and the potential for inflation to return. The
second challenge is managing record levels of government
borrowing without crowding out private sector credit demand.
The RBI promised to return private investment to the
pre-financial crisis level of 12.9 percent of GDP; this level
fell to 8.2 percent of GDP in 2008-09 due to the financial
crisis. Next, the central bank also warned that the Government
of India's fiscal deficit needs to be reduced. Finally, the
central bank stated that in the next three to five years, India
needs to improve its investment climate by initiating financial
sector and governance reforms that promote financial inclusion,
deepen financial markets, and strengthen financial institutions.




Successful Trafficking Bust By Navi Mumbai Police

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6. (SBU) International Justice Mission (IJM) reports that on
July 27, three soliciting agents and several hotel workers were
arrested in Navi Mumbai for trafficking violations, and five
minor girls were rescued in the operation. IJM's Field Office
Director Jonathan Derby told Congenoff that they were finally
successful in working on a sting with the Navi Mumbai police
thanks to the openness of the new police chief and pressure from
the central government urging police to work with NGOs.
Previously, IJM had turned to the Central Bureau of
Investigation when local police were unwilling to act on the
information provided by IJM investigators (see reftel).



Global Office Equipment Supplier Office Depot Thinks Big But
Will Tread Cautiously in India

--------------




7. (SBU) In a meeting with Mumbai Consul General and ConGenoff,
Gary Spund, the Project Director of Office Depot in India,
explained that India's restrictions on foreign direct investment
(FDI) in retail compelled the global provider of office products
and services to form three separate companies to operate in
India. For business-to-business (B2B) sales and corporate
contract business, Office Depot partnered with Mukesh Ambani's
Reliance Retail to acquire eOffice Planet Solutions, a $20
million dealer of office supplies with an established network
across India. Office Depot holds a 51 percent stake and
Reliance Retail has the remaining 49 percent stake in this
company, which will eventually be renamed Office Depot. eOffice
Planet Solutions is also developing an India-wide catalogue for
Office Depot products. Reliance Retail will hold a 100 percent
stake and control all retail outlets selling licensed Office
Depot products, as mandated by India's laws on FDI in retail.
However, Spund emphasized that Office Depot will maintain
operational and procedural control of each and every retail
outlet selling its products. Each retail store will be 2,500
square feet, and the company plans to launch twelve pilot stores
across India by the end of the year. Office Depot's third
company will handle back-end support services including
logistics, supply chain management, and merchandizing for all
Office Depot products and services in India. Spund said that
Office Depot's potential stake in this company is still being
negotiated.




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8. (SBU) Spund believes that FDI will be permitted in retail
within the next two years. Nevertheless, he admitted that
Office Depot would still prefer to enter India with a local
joint venture partner even if 100 percent FDI is permitted in
the retail sector. Partnering with a local who has knowledge of
local conditions, operations, and procedures is critical to
obtaining necessary licenses, clearances, and to do the
preliminary groundwork necessary to initiate business in India,
he said. Spund said that the company planned to open 350 stores
selling Office Depot products within the next 7-8 years. He
acknowledged that the company may slow down its expansion plans
due to the economic slowdown.




9. (SBU) Spund acknowledged that Office Depot faces stiff
competition for corporate customers from small, local
wholesalers mainly due to the low prices these wholesalers
offer. In the retail segment, Spund noted that Office Depot's
main competition will be from the fabled, local "mom and pop"
stores selling office products and not from its primary
international competitor, Staples, who entered the Indian market
in December 2007. Positioning of products within a store is
central to luring customers inside the store, he explained; for
example, high-tech products are the most attractive and thus
need to be positioned so that customers can see them from
outside the store. Spund noted that the middle class are the
main consumers of office supplies and stationery. The real
challenge is to get the upper class into the store to purchase
products themselves instead of sending their chauffeurs or
maids. Office Depot is also developing its own private brand
products for India to adapt to local Indian tastes and
preferences and is also trying to re-train corporate and local
customers to "buy smart." Educating the customer requires
tremendous effort as organized retail is in its infancy in the
country, he added. The executive also admitted that enforcing
Office Depot's international code of ethics and conduct in Asia
is challenging. While prohibiting the employment of child labor
is relatively easy, guaranteeing fixed working hours, payment of
social security benefits and hygienic and safe working
conditions similar to those in the U.S. is more difficult to
enforce abroad, he said.
FOLMSBEE