Car sales in India rose 7 per cent in May, their slowest pace of growth in two years, and analysts expect a further decline as higher fuel prices, interest rates and vehicle costs crimp demand in the world's second-fastest growing vehicle market.

Auto sales, which grew at a breakneck pace of 30 per cent in India in 2010, are driven by a burgeoning aspirational middle class that relies mainly on bank loans for its purchases. But consistently rising interest rates are forcing consumers to tighten their purse strings.

"Interest rate is going up, availability of financing is down, prices are rising and sentiment is not very positive among customers. All this put together is impacting final sales," Sugato Sen, senior director at the Society of Indian Automobile Manufacturers, told reporters.

Petrol prices in India rose by a record 8.6 per cent in May, fuelling concerns about a slowdown in demand for passenger vehicles, with another likely increase in interest rates also expected to curb buying.

In an effort to battle stubbornly high inflation, the RBI has raised interest rates nine times since March last year. It is expected to raise them again this month.

"It was expected in the first half. Customers are delaying their purchases because of high fuel costs and interest rates," an analyst with an international brokerage in Mumbai said.

Sales in China, the world's largest auto market, are also expected to slow after the government stripped away most of its incentive policies at the end of 2010.

Industry observers are divided on how fast that market will grow in the coming years, but the consensus view is to expect a 10 per cent gain annually till 2015.

China, with a comparable population to that of India, also enjoyed auto sales growth of 33 per cent last year. But the Chinese market sells far more cars: Chinese car sales reached 13.8 million units in 2010, while Indian sales totalled 1.9 million units.


Indian automakers sold 158,817 cars in May, compared with 148,425 vehicles a year earlier, data from the Society of Indian Automobile Manufacturers (SIAM) released on Thursday showed.

The growth is the slowest since May 2009, when car sales rose 2.77 per cent. They had jumped 30 percent last May.

"If you look at the numbers now, looks like (reaching fiscal 2012 targets) will be difficult," Sen said.

SIAM expects car sales growth to drop significantly to 16 to 18 per cent this fiscal year ending March, after it grew a record 30 per cent in 2010 to 1.98 million units, driven by demand from a growing middle class in Asia's third-largest economy, easier access to loans and a wider choice of models.

Earlier this month, India's largest automaker, Maruti Suzuki, posted its slowest growth rate in more than two years, with a 1.9 per cent rise in total sales to 104,073 units.

Indian automakers have also expressed worries about rising commodity prices, with Maruti Suzuki, Tata Motors and Mahindra and Mahindra having raised prices on vehicles by an average 1.5 to 2 per cent this year.

Tata Motors posted a 10-per cent rise in auto sales in May, driven mainly by an 84-per cent increase in sales of the Nano, touted as the world's cheapest car. The model had taken a hit when a few of them went up in flames in 2009.

Sales of trucks and buses, a key barometer of economic activity, rose 16.16 per cent from a year earlier to 56,314 units in May, SIAM said.

Shares of Maruti Suzuki were down 0.9 per cent by 12:05 p.m. (0635 GMT). Tata Motors fell 1.9 per cent.

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