After four years of sizzling growth, signs of strain have started showing up in the economy. Inflation is well above the comfort zone, real estate prices have shot up and the rupee has recently touched nine-year highs against the dollar. Large parts of the country have to go without power for hours and the country’s creaking infrastructure is clearly finding it difficult to cope with the 9 per cent-plus rates of growth seen in the past couple of years. These signs of overheating have been worrying the Reserve Bank of India, which has been slowly but steadily raising its policy rate and increasing the cash reserve ratio — funds that banks must park with the central bank — in an attempt to arrest the runaway credit growth.

These measures have started to have some impact. Inflation is showing signs of receding, thanks in large part to the effect of a higher base last year. Anecdotal evidence points to a peaking of property prices. Given the lagged impact of monetary policy, the Reserve Bank of India decided to leave interest rates unchanged in its recent monetary policy statement, preferring to wait and watch before tightening the monetary screws again.

Has the central bank finished with monetary tightening and will the interest rate cycle now turn? Has inflation been beaten? Will the economy manage a soft landing? Or, as many economists believe, will the RBI have to raise interest rates again to lower inflationary expectations to its 5 per cent target? These are some of the questions that are at the centre of a raging debate.

Here is what the experts expect. Growth is almost certain to slow — after all, that is the RBI’s objective. The International Monetary Fund (IMF), in its latest World Economic Outlook, says that India’s gross domestic product (GDP) growth will slow from 9.2 per cent in 2006 to 8.4 per cent this year, and further to 7.8 per cent in 2008. The Asian Development Bank — in its recently published Asian Development Outlook, 2007 — forecasts 8 per cent growth this year and 8.3 per cent in 2008. HSBC economist Robert Prior-Wandesforde, based in Singapore, is more pessimistic, predicting 7.8 per cent growth for the fiscal year 2007-08 and just 6.3 per cent in 2008-09. In a recent report, he explains “The last of these reflects the assumption that the cumulative effects of the monetary tightening will eventually come to bear on the economy. Also, after a period of above-trend growth, one should presumably expect a period of sub-trend growth.”

But the consensus is that while the pace of growth is likely to decelerate, it will still be quite robust. Says Saumitra Chaudhuri, economic advisor, ICRA, a Delhi-based rating agency, “It depends on what you mean by a slowdown. If you’re saying growth will moderate from 9 per cent, that could happen. But if you’re saying it will go down to 7 or 7.5 per cent, I don’t agree.” “If the Reserve Bank keeps on tightening monetary policy like it is doing now, there is a possibility of growth slacking off. However, in the current year we don’t expect less than 8 per cent growth,” said Ravilochan Pola, director and CEO, Kotak Mahindra, in New York.