May 22 (Bloomberg) -- Bajaj Auto Ltd., India's second-biggest motorcycle maker, expects sales to remain sluggish this fiscal year as higher interest rates crimp demand in the world's second- largest two-wheeler market.

Bajaj Auto will focus on models with 125-cc capacity engines or more and won't exit entry-level 100-cc products, Rajiv Bajaj, the company's managing director, said in Mumbai today. The company's motorcycle and scooter sales declined 10 percent to 2.16 million units last year, it said in a release.

Indian sales of motorcycles and scooters fell 7.9 percent in the year to March 31, the first decline in at least five years, as higher loan rates damped demand in a country where most two- wheelers are bought on credit. The central bank is under pressure to raise borrowing costs further to tame inflation that's at a 3 1/2-year high.

``I don't see any revival in sales,'' Bajaj told reporters today. ``We're prepared for a flat market. The situation is unchanged when it comes to credit.''

The Reserve Bank of India twice asked lenders to set aside more funds last month, raising the so-called cash reserve ratio to 8.25 percent, the highest since March 2001, from 7.5 percent. The central bank may increase the ratio for a third time this year to control inflation, according to six of nine economists surveyed by Bloomberg News on April 30.

Bajaj Auto today reported a net income of 1.21 billion rupees ($28 million), for the three months ended March 31. Bajaj, reporting its first earnings since the company was split into manufacturing, investment and finance units, didn't give comparative numbers.

Splitting Bajaj

The former Bajaj Auto Ltd. was split to give the group companies more focus on businesses including insurance, automotive loans and wind energy.

The Pune, India-based company had a marked-to-market loss of 160 million rupees in the quarter, Rajiv Bajaj said in Mumbai today. Full-year net income for Bajaj, which has a technical partnership with Kawasaki Heavy Industries Ltd. for motorcycles, was 7.6 billion rupees.

Bajaj Auto is expanding into the truck and carmaking businesses as competition with Honda Motor Co., the world's largest motorcycle maker, intensifies at home. Honda and its affiliate Hero Honda Motors Ltd. control more than half of the local two-wheeler market.

The Indian company has formed a joint venture with Renault SA, France's second-largest carmaker, and its affiliate Nissan Motor Co., Japan's third-largest carmaker, to build a $2500 car in India.

Code-named ULC, the car will go on sale in 2011, the three companies said May 12. Bajaj Auto will own a 50 percent stake in the joint venture and the rest is equally split between its overseas partners. The ULC will compete with Tata Motors Ltd.'s similarly priced Nano, which is expected to go on sale this year.

Bajaj said the company hasn't reached any conclusion with Renault on selling commercial vehicles.

Bajaj Holdings & Investment Ltd., the listed entity of the group, gained 3 percent to 671.65 rupees in Mumbai stock trading today. Bajaj Auto and financial company Bajaj Finserv Ltd. will list on May 26.