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Car sales in India fell 15.8 per cent in July, the first drop in two-and-half years, and higher interest rates and rising vehicle costs are expected to keep demand subdued for the next few months.

Demand in the world's second-fastest growing major auto market has also been dented by high fuel prices, with many first-time buyers plumbing for motorcycles or scooters.

Automakers sold 133,747 cars in July, down from 158,767 in the same month last year, data from the Society of Indian Automobile Manufacturers (SIAM) released on Wednesday showed.

"We surely expect the situation to improve from this level, but don't see any significant growth. It should be flat for the next month or two, but we do expect numbers to pickup in the festive season," said Nikhil Deshpande, auto sector analyst at PINC Research.

India's festive season starts in September and peaks in early November after the Hindu festival of lights. Sales typically rise during this period as new purchases are considered auspicious and companies offer discounts.

The drop in July largely reflected a 25 per cent fall in sales reported by market leader Maruti Suzuki, as production of one of its popular sedans was crippled due to a shift in its manufacturing facility.

Industry sales growth has been nearly flat in recent months, after jumping 30 percent in the fiscal year ended March to almost 2 million vehicles.

Last month, SIAM lowered its 2011/12 car sales growth forecast to between 10 per cent and 12 per cent from 16-18 per cent projected earlier.

The RBI has raised interest rates 11 times since mid-March last year in an effort to battle stubbornly high inflation, a move that has hurt credit-based purchases.

"I don't think there is lack of demand. I think there is lack of conversion of demand into purchases," said Vishnu Mathur, director general for SIAM.

"Interest rates and fuel prices are going to make a difference," he added.

Sales of trucks and buses, a key pointer to economic activity, rose 23.7 per cent to 64,241 vehicles in July, SIAM said.

Motorcycle sales grew 10.5 per cent to 785,278 vehicles, it said.

Car sales in China, which grew 33 per cent last year, are also expected to slow after the government stripped away most of its incentive policies. Chinese auto sales are forecast to grow at roughly 10 per cent annually until 2015.

China sells as many cars in an average month than India sells in a year. With comparable populations, China's car sales reached 13.8 million in 2010, while Indian sales totalled 1.9 million in the last fiscal year.

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