RBI rate rise to hit auto industry

Disappointed with the central bank's move to raise the key rate by 50 basis points, automotive companies are expecting a severe hit on retail demand, whose growth had already halved during the first quarter this year.

As banks prepare to raise lending rates, demand for cars, two-wheelers and commercial vehicles is expected to come under further pressure, while affecting buying sentiment.

The Society of Indian Automobile Manufacturers is expected to further downgrade its growth forecast. The rise comes even as the market is poised to witness a series of launches, from motorcycles to compact hatchbacks to sports utility vehicles to trucks, before the year-end.

With diffused growth during the first six months of the calendar year, the automotive industry, which relies heavily on vehicle financing, was looking forward to the festive season and new launches for a revival.

Mahindra & Mahindra's automotive president, Pawan Goenka, also the president of Siam, said, "The 50-bps hike in interest rates announced by RBI could hit passenger vehicle sales very hard. The auto industry is already reeling under the pressure of high finance cost, high commodity prices and high fuel prices. The growth rate of passenger vehicle sales has dropped from 33 per cent last year to nine per cent during the last quarter."

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The sector, which has been impacted with high commodity costs and expensive lending rates had revised the growth forecast to 10-12 per cent for the year, from the 16-18 per cent forecast at the start of the year. With another revision on the cards, growth will be only single-digit for the year, say analysts.

"Although some moderation in growth rates was expected, the moderation has been far more than forecast, to a large part due to the successive increases in interest rates that have made it more expensive for customers to purchase vehicles. High interest rates lead to postponement of vehicle purchase, which will have a negative impact on short to medium term sales," Goenka added.

During the first quarter, cars posted growth of seven per cent to 465,000 as against growth of 33 per cent in the first quarter of last year. The segment’s slowest growth in 27 months was in June, at 1.62 per cent.

Vishnu Mathur, director general, Siam, said: "We have to wait and see how much banks react to this hike. We have already scaled down our forecast for the year. In addition, there have been commodity prices hikes, especially oil and other raw materials. This rate hike will further increase the impact. We have to see what banks do."

Apart from peaking interest rates, higher fuel prices have also dented consumer sentiment, leading to less custom at car showrooms. This has led to higher than normal inventory days for some manufacturers.

After witnessing a paltry growth of three per cent during the first quarter, Maruti Suzuki India, the country's largest car maker, is expecting reduced buying power, impacting retail demand.

Shashank Srivastava, chief general manager (marketing), Maruti Suzuki India, “Real estate and automobiles are industries with high ticket products and they would be impacted the most with this rate hike as eventually this will start reflecting on the EMIs consumers pay every month. In automobiles, nearly 70 per cent of the vehicles retailed are purchased availing of financing schemes. There will be suffering on the growth front. Fuel prices and inflation continue to be high. Growth rate will not be anywhere near what was seen over the last two years, last quarter industry grew by 8.5 per cent as compared to the 30 per cent growth seen last fiscal. We expected the industry to turn around the festive season, we have to wait and see what happens now.”

Concurred Arvind Saxena, director (sales & marketing), Hyundai Motor India Limited (HMIL) : “High interest rate, inflation and high petrol prices are already impacting the auto industry growth. If on Tuesday's rate increase is passed on to the retail lending rate for cars, it will further impact the sales. The impact is felt more on small car segment as the customers have relatively lower affordability.”