Well, given that it's probably next to impossible to create that many NPCs and not have a slag pile of a computer after rendering it, I'd say overpopulation is out of the question.
I don't think it is completely out of question. I have been trying to create exactly that for some time now, with other mods and with making my own. For example, there is already http://planetelderscrolls.gamespy.com/View.php?view=OblivionMods.Detail&id=3782, which doubles the population of IC. http://www.tesnexus.com/downloads/file.php?id=11351 also brings a few new NPCs. If you can afford it (yes, some people can), you can also download my IC overhaul, which will in final version also double the population. You will then be able to have a busy city with more content and details, and also with 3 times more people (and a healthier civilian/guard ratio too
). If you can't run the game with such tasking mods, you can always choose something lighter instead, such as Better Cities or ImpeREAL City, and with "only" doubled population - which is still quite enough for a not-so-demanding mainstream.
Edit: Almost forgot http://planetelderscrolls.gamespy.com/View.php?id=3293&view=OblivionMods.Detail http://www.tesnexus.com/downloads/file.php?id=14344. I always recommend that, a huge contribution to cities' atmosphere.