LONDON - As Tata Motors prepares to launch its much-anticipated Tata Nano later this year, recently released data suggests it could be entering a troubled market since demand is not quite as buoyant as expected.

Car sales in July slumped by 1.7%, as double-digit inflation, higher fuel prices and a pullback in lending by banks took its toll, according to figures published by the Society of Indian Automobile Manufacturers on Monday.

At face value, it’s a worrisome development for the Nano. Though Tata Motors (nyse: TTM - news - people ) is hoping to encourage commuters off their scooters and motorbikes and into the Nano, it's also counting on demand for a second car from middle-class families. Still, analysts think it's not entirely bad news.

For one thing, the car market is expected to pick up toward October when companies launch new models for the Deepavali "festival of light" season, while interest rates and inflation are expected to start coming down toward the end of the year.

Deepak Jain, an analyst at Anand Rathi Securities in Bombay, expects that despite the mid-year blip, car sales for the year ending in March 2009 will grow by 8.0%, and by up to 15.0% the year after. There are around nine cars for every 1,000 people in India, compared with over 600 cars per 1,000 in Western markets, says Jain. "To that extent, there is huge demand resilience."

The enormous gap in the cost of a scooter and a car also gives the $3,000 Tata Nano a nice niche to slip into. The cheapest scooter currently costs around 30,000 Indian rupees ($708.3), while the cheapest car, the Maruti 800, costs around 210,000 Indian rupees ($4,956.36).

"Its going to take the car market by storm at least for the first six months or so," says Ramnath Subramaniam, director of research at IDFC SSKI Securities, who estimates that Tata Motors will be able to sell 5,000 a month to begin with--and if it manages to get by without major technical glitches, it could be selling 25,000 a month within a year.

Tata Motors closed down 2.5%, or 11.15 Indian rupees (26 cents), at 436.05 Indian rupees ($10.29) in Bombay.