With the inflation rate as measured by the Wholesale Price Index coming down below the 5 per cent mark for two weeks in succession, there seems to be a mounting feeling that the worst of the overheating is behind us.

Monetary policy can, therefore, resume a neutral stance, letting interest rates remain where they are for a while. If this is indeed the case, then policymakers can pat themselves on the back for having succeeded in soft-landing the economy. Inflation has been brought down to acceptable levels without seriously impeding the growth momentum.

However, before we close the book on this, it is worth reviewing several pieces of evidence that might either support or contradict the view that a soft landing has been accomplished.

For the policy to be deemed a success, two sets of factors need to be considered. One, are the outcomes, in terms of growth rates and inflation, consistent with its objectives? Two, can those outcomes be directly attributed to the instruments used, or were they actually the result of forces beyond the policymakers' control?

Focusing on outcomes, going by the estimates of GDP during 2006-07, which were released last month, there is little to suggest that the policy stance has succeeded in bringing about the desired moderation.

Even though there may be differences of opinion on what the sustainable trend rate of growth is, there are very few people who believe that it is as high as the 9.4 per cent recorded during the previous year. If so, the fact that the growth rate has persisted above the sustainable level in the face of a sustained anti-inflationary stance raises questions about the effectiveness of the policy.

In its defence, though, one must pose the counterfactual: would the growth rate have been even higher had the policy stance been milder? While I do not have a definitive answer to this question yet, based on an assessment of sectoral growth rates, I think it would.

In other words, the policy stance has succeeded in curbing growth, but not to a level that is perceived by many to be sustainable. So, should we amend our views on what the maximum sustainable growth rate is? As I have argued previously in this space, this is a high-priority analytical issue; without a firm benchmark, it is difficult to execute or assess short-term macroeconomic policy. But, for the moment, if the benchmark is 8.5 per cent, or even 9 per cent, there is still an overshoot and the soft landing, while very much in sight, is apparently not yet complete.

Are there signs that it is closer to being so in the first data release for the current year? Far from it! The April numbers for the Index of Industrial Production revealed year-on-year growth of 13.6 per cent, with its manufacturing component growing at 15.1 per cent, higher than the rate for 2006-07.

The judgement that this constitutes a surge in manufacturing, though, has to be tempered by the fact that two sectors --wood and wood products, and food products--grew at astronomical and unprecedented rates of 92.2 per cent and 55 per cent, respectively. If one is disinclined to accept these numbers as indicative of a major trend, moderating these down to levels closer to their growth rates over the past year brings the overall rate down quite considerably, even below last year's rate.

Let's turn to the inflation rate. The decline below the 5 per cent mark is mainly due to the fall in prices of agricultural commodities and energy over the past few weeks, combined with a relatively high base from last year.

As such, this is primarily a supply-side adjustment; high rates of inflation over the past months were significantly driven by these supply-side factors and their abatement naturally brings it down.

But, what of demand pressure, which is best reflected by the inflation rate in the manufacturing sector? It has certainly stopped increasing, but there aren't strong indications that this is easing. This is a limited endorsement of the effectiveness of anti-inflationary policy. While it is tempting to attribute the reduction in the rate of inflation to the policy stance, it isn't quite correct to do so when the drivers are primarily from the supply side.

Next, let's look at the intermediate variables and the role that they might be playing in the soft landing. Interest rates have clearly risen, the most direct consequence of the policy stance. Their effectiveness in moderating demand pressures, however, was limited in the early part of the policy cycle by the ability of lenders to mitigate the impact by, for instance, extending loan tenures.

Having apparently exhausted this option, over the past few months, there is evidence of slowing growth in overall lending. This, in turn, is consistent with signs of deceleration in sectors such as transport equipment, but it does not yet seem to have impacted on the investment boom, which is reflected in consistently high growth rates in the machinery and equipment sector.

The new kid on the block in the intermediate variables category is the exchange rate. When we moved from an effectively fixed rate to an effectively floating one a couple of months ago, the pressure of a structural balance of payments surplus caused a sharp appreciation in the rupee.

There is an ongoing debate on the merits of this development. Many people expect a return to the previous stance (although it's not evident what the new rate will be).

It is important to point out, though, that the debate is premised on the loss of export competitiveness and its consequences on employment.

From a strictly neutral macroeconomic perspective, it doesn't matter what the channel of demand moderation is; declining exports and increasing imports will contribute to the easing of the growth rate. In other words, rupee appreciation is a logical component of the soft landing policy, but its use has wider political economy implications.

To sum up, as far as outcomes are concerned, the evidence on a soft landing, while not yet conclusive, shows movement in the right direction. However, the channels of transmission from policy to outcomes appear to be working as expected, within constraints.

The overall approach appears to have been vindicated. More importantly, this episode has left us with a greater appreciation of both the constraints and extraneous factors that can either neutralise or reinforce the effectiveness of policy.

The author is chief economist, Crisil. The views here are personal.