Auto parts maker Bosch expects a challenging fiscal second half but is still investing heavily in research and development as well as capacity increase across its five manufacturing units in India, a top official has said.

The local unit of the German Bosch group is the largest Indian auto parts maker by market capitalisation. It had about INR30b as cash on its books as of June, managing director VK Viswanathan told Reuters in an interview.

“The general trend we have been seeing for the last couple of months is that growth rates have come down quite sharply, particularly in the passenger car side. The next two to three months are going to be tough,” he told the news agency.

Indian car sales, which grew at 30% in the fiscal year ended 31 March, are now expected to slow to 10 to 12% in fiscal 2011/12, down from an earlier forecast of 16 to 18%, the Society of Indian Automobile Manufacturers has forecast.

India is Asia’s third largest economy and June news car sales there grew at the slowest pace since March 2009.

Many car buyers rely on bank loans but India’s central bank raised interest rates by a higher-than-expected 50 basis points, its 11th increase since March 2010.

Industry officials have said such aggressive hikes could hurt liquidity and increase cost of funds.

“On the other hand, many OE (original equipment makers) companies have lined up a lot of new launches. And hopefully inflation should settle down. With festival demand in October-November we should see some slight revival leading to normalcy from Jan-Feb onwards,” Viswanathan said.

The autoparts sector contributes some 2.3% to India’s gross domestic product (GDP) and is expected to book sales of US$30bn in 2010/11, Reuters noted.

The local Automotive Component Manufacturers Association expects turnover to touch $110bn by 2020.

Bosch reported a 33.5% rise in June quarter net profit as lower depreciation costs as well as higher treasury income and cost control measures offset rising commodity prices and inflationary pressures during the quarter.

Bosch is expanding capacity across a range of components including diesel and petrol fuel injection systems, pumps as well as starters and generators.

The firm expects additional capacity to come on line by early next year, Viswanathan told Reuters. It has lined up capital spend of about INR6bn this year, part of a INR13bn outlay over three years to expand.

The Bosch group in India, which consists of six legal entities including the autoparts firm, contributes about 3% of the group’s global revenue. The German group generated annual sales of EUR47.3bn in 2010 and has around 350 subsidiaries across the world.

“We are not cutting back either on recruitments or investments, we are going ahead with expansion as planned,” Viswanathan said, adding the expansion will be funded by debt free-Bosch’s internal accruals.

Part of the investments will also go towards boosting research and development activities and the firm typically spends between 15-20% of its annual capital outlay on R&D, Viswanathan said.

Bosch Ltd has around 350 engineers working solely on R&D, he said. “We will hire 20-25% more on research and engineering” he told Reuters.