"At this point I don't see or I would not assess the economy as overheating," Kalpana Kochhar, the senior advisor in the Asia Pacific department told PTI.

"With the actions they (Reserve Bank of India [Get Quote]) took over the last twelve months... monetary conditions in general have been tightened. You are seeing inflation coming off and some slowdown in credit growth. These are all good things," she said.

The IMF official said there are still some underlying pressures like capacity constraints. "Our view is that the RBI should be vigilant... earlier this year we had sort of assessed the situation as sort of over heating," the senior official remarked.

Replying to a query on foreign exchange markets and the appreciation of the Indian Rupee, Kochhar said the pressure on the exchange rate is going to continue not because of any current account surplus but that India is a "story" that everyone wants to be a part of.

"The RBI's official policy has been to intervene to smooth volatility rather than to target a rate. Frankly, the evidence is that's what they do, more or less. The Rupee is appreciating and volatility, if you measure daily movements, has gone up quite a lot in the last year," Kochhar said,

adding "we would not have issues with that kind of policy - moderating the pace of volatility while keeping the Rupee market determined...."

Kochhar said there was pressure on the exchange rate not because of a current account surplus. "Capital is coming in because India is a story. Every body wants a piece of India, a return... frankly I think it is going to continue.

"The appreciation of the exchange rate is a market determined phenomenon and would continue to happen," the IMF official said.

Kochhar said there are going to be certain sectors in India like textiles and perhaps automobile parts that are going to face the pressure and will need some temporary government assistance.

"But in our view our answer to that is not necessarily keeping the exchange rate at a level that is not aligned with the market. Rather if there are serious problems... they need to find efficiency and in the interim the government needs to come up with assistance that is targeted to sectors," the senior IMF official said.

"It may not be such a bad idea except it has to be timed down and removed when the time is right. But the way to get durable gains in competitiveness is not by manipulating or holding the exchange rate...," Kochhar said.