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Indias inflation is producing an unexpected beneficiary. Motorcycle makers are poised for record sales this year as the highest borrowing costs among Asias major

economies push consumers to choose a cheaper ride. Two-wheeler deliveries rose 2percent in

October, extending consecutive monthly gains since January2009, while passenger- vehicle sales tumbled the most in more than a decade, as the central bank implemented the fastest round of interest rate increases in its history. The worst affected is the passenger-car market, where the dependence on loans and the ticket price is high, said Ravi Sud, chief financial officer of Hero Moto Corp. Ltd., maker of almost half the motorcycles in India. Only about 30 percent of buyers buy a motorcycle with a loan. Motor cycle manufacturers are gaining at the expense of Tata Motors Ltd. (TTMT), maker of the worlds cheapest car, Maruti Suzuki India Ltd. (MSIL) and Ford Motor Co. (F), as consumers put off auto purchases, forcing the industry group to cut its growth forecast for a second time this year. About 80 percent of cars are bought with loans, according to market researcher IHS Automotive. People want to feel good when they buy a car, said Deepesh Rathore, the managing director of IHS Automotive in India. Right now, they are worried about the economy.

Motorcycles have traditionally outsold passenger cars in India. Last year, the ratio was about 6 to 1. Tata wanted to persuade motorcyclists to upgrade to the Nano, but that has become increasingly difficult as interest rates have risen. Heros best-selling 100-cc Splendor motorcycle starts at 42,350 rupees ($830) in New Delhi, compared with Tatas Nano at 140,880 rupees, according to the companies websites. Marutis lowest-priced model, the 800 minicar, sells for about 197,000 rupees.

More Sense
More people are opting for two-wheeler licenses, said Pratap Tavadkar of Shiv Krupa Motor Driving School in Mumbais suburb of Borivali. Petrol prices keep rising and car prices are also going up and so, especially for short distances, bikes make more sense. India has the highest borrowing costs in Asia after Pakistan and Vietnam. The Reserve Bank of India has raised the central banks repurchase rate by 375 basis points since mid- March 2010 to 8.5percent to tame inflation. Thats the fastest pace of increases since its establishment in 1935, Bloomberg data shows. Gasoline costs were at a record 68.64 rupees a litre in New Delhi before Indian Oil Corp. (IOCL), the nations biggest refiner, cut pump prices by3.2 percent on Nov. 15 following protests by the opposition and some members of the ruling coalition. Prices remain 26 percent higher than a year ago after the reduction, according to figures from the refiners website.

Rural Growth
Hero forecasts net sales to rise 27 percent this fiscal year, driven by growth in rural areas. The New Delhi-based company will boost the production capacity of its existing factories to 7 million units by March from 5.4 million last year, and build a fourth factory by 2013, according to Sud. Honda Motorcycle & Scooter India Pvt., a unit of Tokyo- based Honda Motor Co., plans to expand its dealer and service outlets by 25 percent to sell 2.1 million two-wheelers this fiscal year, Naresh Kumar Rattan, vice president for sales, said in an interview. The company sold 1.5 million units a year ago.

Industry Sales
Total sales of motorcycles and scooters rose to 1.15 million units last month, according to the Society of Indian Automobile Manufacturers, or SIAM. Passenger-vehicle sales fell for a fourth month in October, dropping 24 percent to 138,521 vehicles, according to the association. Thats the steepest monthly decline since December 2000, according to SIAM. Manufacturers sold 11.8million two-wheelers last fiscal year, the most ever, compared with1.98 million passenger cars. For recovery to happen, interest rates have to go down, Vishnu Mathur, director general of the industry body, said of car sales on Nov. 9 in New Delhi. Also, fuel prices need to cool. The auto group, which cut its estimate for car sales last month, is forecasting growth of as low as 2percent for the year ending March 31. In April, it projected an 18percent rise and lowered that to 12 percent in July.

Nano, Alto
Demand for the Nano, the $2,800 mini car that Chairman Ratan Tata developed to entice first-time buyers, has dropped since it was first introduced in 2009. Local deliveries plunged 67 percent in the quarter ended Sept. 30 to 7,398 units, contributing to a 15 percent slump in second-quarter profit at Tata to 18.8 billion rupees, according to the Mumbai-based company. Fords Indian unit had an 8.4percent drop in April-to- October sales to 52,166 units, led by a decline in deliveries of its entry-level Figo hatchback, according to association data. Maruti, which sells almost half the cars sold in India, said fiscal-year sales slumped 17 percent through October, as demand for its Alto, the nations best-selling model, waned and a series of strikes increased the waiting time for its Swift hatchback. The percentage of first-time buyers isnt really increasing as well as we would like it to, said Mayank Pareek, head of sales and marketing for New Delhi-based Maruti, which is 54 percent owned by Japans Suzuki Motor Corp. Everybody needs mobility and since they cant afford better mobility, they stick with the basics which they can afford.