Aug. 10 (Bloomberg) -- India's industrial production grew in June at the slowest pace in eight months, below all estimates, as interest rates at a five-year high curbed consumer spending.

Production at factories, utilities and mines rose 9.8 percent from a year earlier, following a revised 10.9 percent gain in May, the Central Statistical Organisation said in a statement in New Delhi. Analysts expected an 11 percent increase.

Companies including motorcycle maker Bajaj Auto Ltd. and Tata Motors Ltd., India's biggest producer of trucks and buses, have cut output in the past two months as higher borrowing costs discourage buyers. The Reserve Bank of India may keep interest rates unchanged as inflation has also cooled.

``The downturn in exports and the impact of higher interest rates is beginning to take its toll and we expect this to continue,'' said Robert Prior-Wandesforde, an economist at HSBC Holdings Plc in Singapore. ``The central bank looks set to sit on its hands as far as policy rates are concerned.''

India's key Sensitive index fell 1.5 percent at 3:30 p.m. close, joining a global rout, on concern economic growth will slow as losses tied to U.S. subprime mortgages spread. The yield on 10-year government bonds was little changed at 7.98 percent, while the rupee dropped 0.2 percent to 40.635 against the dollar.

The Reserve Bank of India has raised its policy rates by 2.25 percentage points since October 2004 to curb loan growth and keep inflation below a 5 percent target, a level achieved the past eight weeks. Loans to consumers and companies rose 23.6 percent in the year to July 20, compared with a 31.7 percent gain in the same period last year, the central bank said Aug. 3.

Stronger Currency

Merchandise exports, which account for two-fifths of India's industrial output, grew 14 percent in June, the slowest pace in three months, as the rupee rose 9.1 percent this year, making it the best performer in Asia. The central bank allowed the rupee to gain to make imports cheaper and contain inflation.

Consumer goods production grew 4.2 percent in June, half the pace in May, according to today's statement. Manufacturing output gained 10.6 percent compared with a 10.9 percent increase in the previous month. Mining rose 3.6 percent in June.

``Higher interest rates will impact overall demand,'' said Praveen Kadle, finance director at Tata Motors, whose sales fell for the third month in July.

Hero Honda Motors Ltd. and Bajaj Auto, India's top motorcycle makers, announced production cuts in June and posted declines in sales in July.

Waning Confidence

Havell's India Ltd., the country's biggest producer of switches for households, is trying to beat diminishing demand by selling more in smaller towns.

Business confidence in India has fallen for two straight quarters due to higher interest rates and a rising currency, the National Council of Applied Economic Research said. The business confidence index, based on responses from 493 companies, declined to 137.9 in the current quarter ending Sept. 30 from 151.3 in the preceding quarter, according to the research group.

India's manufacturing expanded at a slower pace in July, ABN Amro Bank NV said on Aug. 1 on the basis of its purchasing managers' index, which declined to the lowest level in more than two years on account of increased borrowing costs and the gains in the rupee.

India's central bank on July 31 held its key reverse repurchase rate at 6 percent and reiterated that economic growth will slow to about 8.5 percent in the current financial year ending March 31 from 9.4 percent in the previous year.

Still, it ordered banks to curb lending and investment for the third time this year to soak up excess cash and keep a lid on inflation.

To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net.

Last Updated: August 10, 2007 08:24 EDT