The largest market for RE, by a large margin, is in their home country and the 350 has always been very popular there. If they invested in a far larger engine size it would probably only sell in small numbers in India.
Seems to me that they are taking things very sensibly and gradually improving their reputation across the rest of the world. Let's face it - until very recently RE was seen as an enigma, a "dinosaur" brand, almost a joke outside of India. However, by sensible management they are emerging as a world brand, offering good, middle range bikes at a sensible price. Hopefully in time they will be able to expand further and be able to sell bigger bikes which appeal to those wanting more power, which probably still won't be their home market.
They have undoubtedly taken trade from Triumph, which I'm not alone as seeing as very much overpriced now. I can see them also producing something like a reasonably priced version of a modern Norton sporting twin, possibly an 850, which I think would sell very well. How about Royal Enfield "Commander" as a name.....?