VZCZCXRO1984
PP RUEHBI
DE RUEHBI #0588/01 3541150
ZNR UUUUU ZZH
P R 191150Z DEC 08
FM AMCONSUL MUMBAI
TO RUEHC/SECSTATE WASHDC PRIORITY 6831
INFO RUEHNE/AMEMBASSY NEW DELHI 8076
RUEHBI/AMCONSUL MUMBAI 2000
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEHAAA/NSC WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/WHITE HOUSE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC

UNCLAS SECTION 01 OF 02 MUMBAI 000588 
 
SENSITIVE 
SIPDIS 
 
DEPT PASS TO EXPORT-IMPORT BANK FOR JESSICA FARMER 
DEPT PASS TO USTR AADLER/CLILIENFELD 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD EINV IN
SUBJECT: RBI GOVERNOR SUBBARAO DISCUSSES THE INDIAN ECONOMY IN THE 
WAKE OF THE GLOBAL FINANCIAL CRISIS 
 
MUMBAI 00000588  001.3 OF 002 
 
 
¶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 
------------------------------------- 
¶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 
-------------------------------------------- 
 
¶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" 
---------------------------------------- 
 
¶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. 
 
MUMBAI 00000588  002.2 OF 002 
 
 
 
Trade Finance Constraints are Not as Bad as Thought 
--------------------------------------------- ------ 
 
¶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 
----------------------------------------- 
 
¶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 
------------------ 
 
¶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 
--------------------------------------------- ---------- 
 
¶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