Nov. 8 (Bloomberg) -- India's industrial production growth probably slowed in September as the highest interest rates in a decade crimped consumer demand and a strengthening currency made exports less competitive.

Production at factories, utilities and mines rose 9.2 percent from a year earlier after gaining 10.7 percent in August, according to the median forecast of 15 economists in a Bloomberg News survey. The Central Statistical Organisation's report is due around noon in New Delhi on Nov. 12.

The Reserve Bank of India, forced to keep rates high to curb prices in Asia's third-biggest economy, expects a ``marginal moderation'' in industrial activity this year. Cash from record foreign investments has caused the rupee to gain the most in at least 33 years, and now threatens to spur inflation.

``India's central bank is in a Catch-22 situation,'' said Sujan Hajra, chief economist at Anand Rathi Securities Pvt. Ltd. in Mumbai. ``There are signs of a slowdown in the real sector, but it can't cut interest rates because capital inflows are a risk to inflation.''

Demand for Tata Motors Ltd. buses and Bajaj Auto Ltd. motorcycles is waning after three years of rising borrowing costs in the $906 billion economy.

The central bank has raised its benchmark interest rate nine times since October 2004 to fight inflation, prompting commercial banks to increase their lending rates to the highest in almost a decade. State Bank of India, the country's biggest, charges 12.75 percent interest on loans to its best customers, the most since 1999.

Bank Loans

Higher borrowing costs have slowed growth in bank loans to consumers and companies to 23 percent in the fortnight ended Oct. 12 from 29 percent in the same period last year, according to the central bank. That's reducing demand for real estate, automobiles and other products.

Total automobile production, including buses, cars and motorcycles, fell 6.9 percent in September from a year earlier, according to the Society of Indian Automobile Manufacturers.

Still, overseas investors are buying shares in the country to profit from an economy that's expanded an average 8.6 percent since 2003, the second-fastest pace in the world after China. That's flooding the banking system with cash and threatens to push up prices of goods and services.

Global investors have bought an unprecedented $18.7 billion of Indian shares and bonds this year, double the previous record of $9.46 billion in 2005. That has sent the Bombay Stock Exchange's benchmark stock index higher by 40 percent since Jan. 1, while the rupee has climbed 12.8 percent.

Stronger Currency

The gain in the rupee has hurt merchandise exports, which make up half of India's manufacturing, Anand Rathi's Hajra said. Overseas sales in the six months ended Sept. 30 rose 18.5 percent, almost half the pace in the same period the year earlier, according to India's commerce ministry.

To prevent inflows from reviving inflation, India's central bank last week ordered lenders to set aside more reserves for a fourth time this year.

The Reserve Bank raised the ratio of deposits lenders must put aside by half a point to 7.5 percent and held its benchmark interest rate after raising it nine times since October 2004.

India's September Production Forecasts

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               Index of Industrial Production
Company                           YoY% Change
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Median                                   9.20%
Average                                  9.32%
High                                    10.40%
Low                                      8.30%
Number of Estimates                         15
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Anand Rathi Securities                    9.2%
Citi                                      9.7%
Credit Analysis & Research Ltd.           8.8%
CRISIL Ltd.                               9.6%
Edelweiss Securities                      9.1%
Forecast Singapore                        9.0%
HSBC                                      8.5%
IDBI Gilts Ltd.                           9.0%
ING Vysya Bank                           10.4%
Inst. of Economic Growth                  8.3%
JPMorgan Chase Bank                       9.4%
Lehman Brothers                           9.0%
Standard Chartered Bank                  10.0%
Thomson IFR                               9.4%
Yes Bank                                 10.4%
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To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net.

Last Updated: November 7, 2007 13:31 EST