RBI decision could raise auto loan rates and put pressure on retail demand

The Reserve Bank of India’s (RBI) decision to raise the policy rate could see banks raise rates on car loans, which would likely weigh on demand at the retail level – especially for the two- wheels – even as demand for cars and SUVs continues to rise.

Auto loans in recent years hit their lowest level, becoming one of the reasons for the passenger car industry’s record backlog. At the end of April, the automotive industry had an open order of 750,000 units.

Impact on demand

Shashank Srivastava, Senior Executive Director – Marketing and Sales, Maruti Suzuki India, said: “About 80% of passenger vehicle (PV) retail sales are through finance. A rise in tariffs will have a negative impact on demand. But it depends on the magnitude of the increase.

In April, domestic PV sales rose 2.35% to 2.93 lakh units from 2.86 lakh units sold in the same month a year earlier. A rise in car loans will have a greater impact on two-wheeler buyers than on car buyers. Market watchers believe the rise comes just as demand for two-wheelers turned the corner following wedding season buying.

Vinkesh Gulati, President of the Federation of Automobile Dealers Associations (FADA), said: “Although the PV segment may be able to absorb this shock due to long waiting periods, the two-wheeler segment – who has been a non-performer – will not be. be able to bear a further blow from the high costs of the car loan.

Blow on purchases

Demand for two-wheelers remained subdued due to an underperforming rural market, price hikes by manufacturers and high fuel costs. In addition, car manufacturers are worried about the rise in inflation which has eroded consumer confidence and their purchasing power.

Rakesh Sharma, chief executive of Bajaj Auto, said: “I would be more concerned about inflation and if that is brought under control, it will protect the purchasing power of customers.”

Domestic two-wheeler sales in April recorded their first growth in 10 months. Six manufacturers collectively sold 15.3 per cent more two-wheelers that month, to 1.09 million, from 9.53 lakh units sold in April 2021.

Mitul Shah, research analyst at Reliance Securities, said: “With the industry already under pressure from rising fuel prices, inflation-driven commodity price hikes and lower demand, this (the impact of the RBI move) would have a negative impact on auto purchases. The two-wheeler segment is relatively more sensitive to price increases and tariff increases.

Published on

May 04, 2022

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