Rajan sees economy picking up by end of fiscal

The flow of billions of dollars worth of resources to infrastructure projects that have been fast-tracked by the government combined with the good monsoon season will help the Indian economy bounce back by the end of year, Reserve Bank governor Raghuram Rajan has said.

Addressing students and faculty of the Harvard Business School in Cambridge, Massachusetts, Rajan, however, refused to hint at the likely outcome of RBI's upcoming monetary policy review.

RBI is due to review monetary policy on 29 October in the backdrop of an inflation that has gained pace, placing the odds in favour of yet another central bank interest rate hike despite a slowing economy.

"The correct question is: 'are you going to raise rates or not?' The answer is: 'I'm not going to tell you,' " Rajan said.

Later, however, Rajan said that he believed India`s economic growth would start picking up in the fourth quarter, gaining from the flow of resources into projects worth over $115 billion, stalled so far over environmental and regulatory issues.

"The effects of that clearance will show up toward the end of the year. So growth will start picking up because these large projects will start coming back on-stream," he said.

He did not say by how much the economy will grow.

"The second piece of good news is the monsoon has been very good ... with a bountiful harvest, and with the associated activities like animal husbandry, poultry, also picking up, you can see a lot more value in the rural areas, which will help sentiment and growth," he said.

India's annual economic growth has slowed sharply in recent years to below 5 per cent levels, from around 8 per cent and above between 2002 and 2012, while the twin deficits - current account and fiscal deficit – have been ruling above RBI's permissible limits.

While Rajan surprised markets last month with an interest rate hike of 25 basis points despite worries over the rising pace of inflation, it is difficult to guess his moves right now.

Rajan, meanwhile, pointed out that India's economic troubles are not the result of any structural infirmities, but were more likely to do with the unwinding of stimulus in the wake of the global financial crisis and a spike in non-essential spending like the rising demand for gold.

"If you are an outsider looking at India, learn to filter out both the irrational exuberance and the excessive pessimism. We're subject to both. You will become manic-depressive if you follow our moods."

He said the question of using interest rates to address inflation was more complicated in India than in the United States.

"In the US you know there is a large interest rate-sensitive sector that is going to be affected when you raise interest rates ... But what if you have a large part of the country that is not connected directly to the financial system?" he said.

"There`s a lot that is going on to fix these medium-term problems," he added.