RBI’s repo rate cut to act as catalyst for auto sales

The RBI’s decision to cut interest rates in its bi-monthly monetary policy review may not have come as a surprise to anyone; however few had anticipated a cut of 50 basis points from the central bank today. The downward revision in key policy rates to 6.75% from 7.25% earlier not only bodes well for the overall Indian economy, but also holds the key to the recovery of the automotive industry.

According to analysts, given that the interest rates have fallen significantly and that too right in the middle of the festive season, consumer demand for automobiles is set to rise in the coming days.

Automotive sales in the country, although increasing, have not shown a significant improvement in the last few months. August 2015 sales numbers were a mixed bag for the Indian automobile industry. Even as car sales grew for the 10th straight month, a fall in overall two- and three-wheeler sales point towards a slow recovery amidst faltering demand due to erratic monsoon patterns.

However, now with the decline in rates, most industry representatives believe that with the transmission of RBI’s rate cuts to the consumers, loans would get cheaper and sales would pick up in the remainder of the financial year.

According to VS Parthasarathy, chief financial officer and group CIO, M&M: “Dr Rajan surprised the market with a deeper than expected rate cut. This cut comes as a balm for anxious markets and I see the relieved celebration in the equity and fixed income markets. This pre- Dusshera / Diwali gift will lift the festive demand as banks will hopefully start reducing the cost of consumer loans. The industry’s expectation of a turnaround in demand led growth in the second half will now be well anchored.”

With large public and private sector banks already announcing the transmission of lower interest rates, the rural and semi-urban customers can now have some respite, as they have been affected by a deficient rainfall this year. Easy availability of loans could have a direct impact on the two-wheeler and farm equipment sales in the coming months, due to resurgent demand from these areas.

Two-wheeler sales had fallen 2.9 percent in August to 1.30 million units due to the continued decline in motorcycle sales which fell 9.6 percent to 823,053 units. Meanwhile, scooter sales had risen, clocking 15.66 percent growth year on year to 427,165 units. LCV sales had also struggled last month, with a de-growth of 7.41 percent to 29,182 units.

Given the anticipated transmission of lower interest rates, sales of passenger cars could grow even faster and those of light commercial vehicles could recover.

“With a slew of recent launches, demand appetite for passenger cars and scooters is high, now with a cut in interest rates consumer sentiment will only improve from here on. Car and two-wheeler sales generally go up around this time of the year, but we could see a sharp rise in sales in the next two months,” says an automotive analyst with an international brokerage.