The SIAM estimated that car sales would grow by 11 to 13 percent in 2012-13, well above the zero to two percent growth it currently expects this fiscal year.

"The current quarter and the next fiscal year should be better," SIAM senior director Sugato Sen.

Sen said he expected India's central bank to announce "some policy measures" in coming months that would help boost economic growth and kick-start demand for cars.

India, which has been one of the world's fastest growing car markets in recent years, saw sales plummet by 24 percent year-on-year in October, the biggest slump in more than a decade.

Since November, car sales have improved slightly but remain subdued with many potential buyers deciding to defer their purchases or cancel them altogether because of costly Car loan and rising fuel costs.

The cost of borrowing has risen due to high inflation, which the Reserve Bank of India has tried to rein in by raising interest rates 13 times since March 2010 until pausing last month.

New car sales in India rose 8.5 percent year-on-year to 159,325 in December, up from 146,856 in the same period in 2010, as the industry showed further signs of a recovery from its worst slump late last year, SIAM data showed.

The figure represents the second straight monthly gain.

Discounts helped to partially offset weaker demand for cars over the second half of the year.

SIAM also expects demand for commercial vehicles and motorbikes to improve in the next financial year starting April 1. Commercial vehicle sales are expected to grow by 12 to 14 percent and two-wheelers by 11 to 14 percent.

Mahantesh Sabarad, an auto sector analyst with Fortune Equity Brokers in Mumbai, broadly agreed with SIAM's 2012-13 estimates.

"We expect to see a softening of interest rates in coming months, which would boost consumer spending and demand for cars," he said.

Car sales in India rose by 30 percent in the year to March 2010, as global carmakers like Ford, GM, Toyota and Volkswagen ramped up operations in Asia's third-largest economy in search of new markets.