Rising incomes and new launches in a fast-expanding economy have boosted profits of auto makers in India.
"Growth for FY07 will probably be around 20 percent, and there is no reason to believe we won't see similar growth in FY08, unless something changes significantly," said Pawan Goenka, president of the firm's automotive unit.
Mahindra, India's top utility vehicle and tractor maker, raised prices on its vehicles by up to 1,800 rupees ($27) on Thursday after India's federal budget proposed an additional tax for the fiscal year starting April 1.
The government said on Wednesday it would impose a levy of 1 percent on all taxes to raise funds for education, in addition to an existing 2 percent levy, which several auto makers have said they would pass on to the consumer.
"It is too small an increase to affect demand," Goenka said on the sidelines of the launch of a new variant of its Bolero utility vehicle.
"But the real concern is interest rates. They have been rising, but so far overall industry growth and consumer demand have not been affected. If interest rates go up any further, that will affect demand," he said.
Analysts say India's central bank will probably continue to tighten policy over the next few months -- after five lending rate increases in 13 months -- either through higher interest rates or quantitively, to check rising prices.
Mahindra, which is preparing to launch the no-frills Logan sedan in a joint venture with France's Renault, will also roll out Ingenio, a new utility vehicle, from 2008.
These vehicles, along with the Bolero, will be made at Mahindra's facilities in Nashik in the western Maharashtra state, which has an expanded annual capacity of 150,000 units.
"We do have production constraints in Nashik," Goenka said.
"But a decision to expand production of the Logan will depend on market conditions."
Mahindra and Renault have agreed to make 50,000 units a year.
Mahindra also has a joint venture with Navistar's International Truck and Engine Corp. to make trucks and buses.
Japan's Nissan Motor Co. said earlier this week it would team up with Mahindra and Renault to invest in a $905 million car project in southern India.