India’s passenger vehicle (PV) market closed the financial year 2025-26 on a historic note, with retail sales crossing the 47-lakh mark for the first time. However, this record performance was shaped by sharp contrasts, with a subdued first half followed by a strong policy-led rebound in the second.

Much of the growth in the second half of the year was driven by the government’s push to boost consumption through policy interventions, improving macroeconomic conditions, and tactical industry actions.

“The year did not start out exciting, but it became exciting because of the interventions that GST brought in. There was a clear indication that more money was coming into consumers’ hands, and that supported demand,” said Ravi Bhatia, President, JATO Dynamics India.

According to data from the Federation of Automobile Dealers Associations (FADA), PV retail sales stood at 47,05,056 units in FY26, up 13% year-on-year. The industry moved through two distinct phases during the year, shaped as much by macroeconomic uncertainty as by policy intervention.

The April to September period was marked by caution. Geopolitical tensions with Pakistan, tariff uncertainties, and heavy rains disrupted both supply chains and consumer confidence. Financing remained tight, and buyers, especially in the entry-level segments, deferred purchases amid uncertainty around GST 2.0.

The result was a muted first half, with dealerships reporting slower footfalls and rising inventory levels. PV stock, which had been a persistent concern throughout FY25, remained elevated in the early months of FY26. During this period, PV sales grew 4% year-on-year to 19,50,586 units.

The narrative changed decisively in the second half. The rollout of GST 2.0 improved affordability, particularly in the small and mid-size car segments, and helped unlock pent-up demand. The recovery was also aided by a strong festive season, lower borrowing costs following repo rate cuts, a stabilizing macro environment, and aggressive discounting and pricing interventions by OEMs.

The second-half surge was further underpinned by a release of pent-up replacement demand, as customers who had deferred purchases amid high prices and uncertainty returned to the market following GST-led corrections.

The strength of the recovery was evident in Q3, which saw record PV sales of over 12.7 lakh units, underscoring the sharp demand rebound following GST-led interventions.

“FY26 was clearly a two-phase year. The second half saw a decisive upshift as GST 2.0 improved affordability, lifted sentiment, and triggered broad-based retail momentum,” said FADA President CS Vigneshwar.

Importantly, the year also marked a shift in OEM strategy, with higher pricing power and premiumization driving improved margins, as automakers balanced affordability gains from GST with selective price increases.

“We saw average prices go up; mass-market car prices went up by over 5% and luxury cars by about 8.8%, which clearly indicates that margins improved for automakers,” Bhatia said.

The recovery was not just visible in overall PV volumes but also in inventory discipline. Dealer stock levels corrected sharply from over 50 days to around 28 days by March, signaling a healthier balance between wholesale dispatches and retail demand. For the first time in recent years, the industry appeared aligned, and what was being sold to dealers was largely being sold to customers.

However, industry sources indicate that inventory remains uneven, with faster-moving models facing supply constraints while slower-moving variants continue to account for a significant share of dealer stock.

In FY26, rural markets emerged as a key growth driver for PVs, outpacing urban regions by a meaningful margin. Rural sales grew by 17.12% during the year, compared to 10.43% in urban markets.

“Rural demand has been a key driver of growth, supported by improved farm incomes and favorable monsoon conditions,” said Hemal Thakkar, Senior Director, Crisil Intelligence.

The stronger rural traction was supported by improved farm incomes, better monsoons, and increasing aspiration-driven purchases, particularly in SUVs and utility vehicles. In contrast, urban demand remained relatively measured in the first half due to macro uncertainties and financing constraints, before picking up pace in the second half following GST 2.0-led improvements in affordability and sentiment.

A Reshaped Pecking Order

FY26 did more than just deliver record volumes; it altered the competitive landscape of India’s PV market.

For years, the hierarchy beneath Maruti Suzuki India Ltd had remained relatively stable, with Hyundai Motor India Ltd holding the second position and Tata Motors Passenger Vehicles Ltd and Mahindra & Mahindra Ltd alternating between third and fourth. FY26 disrupted that order.

Mahindra emerged as the second-largest player with a 13.42% market share. Hyundai slipped to fourth place with a 12.29% share, down sharply from 13.48% in FY25. Even market leader Maruti Suzuki saw its share decline to 39.71% from 40.20% in FY25, marking the fifth consecutive year of erosion since FY22.

The used car market has also been slower to adjust to the new price dynamics, further complicating recovery in the entry-level segment.

Hyundai, on the other hand, faced a different set of challenges. While it has a broad portfolio, parts of it have aged, and its positioning appears increasingly misaligned with the fastest-growing segments of the market. The company has had limited successful offerings in the highly competitive sub-Rs 12 lakh SUV segment, where demand has surged.

The erosion in Hyundai’s share is particularly notable. The company’s domestic volumes declined even as the broader market expanded, making it the only one among the top-four OEMs to report negative growth.

In FY26, other mass-market players delivered mixed performances. Toyota Kirloskar Motor Pvt Ltd continued to gain traction, aided by strong hybrid offerings, increasing its share to 7.13%. Kia India Pvt Ltd held steady with a 5.94% share, and Skoda Auto Volkswagen Group saw its share increase to 2.34%. Meanwhile, Honda Cars India Ltd and Renault India Pvt Ltd saw marginal declines, reflecting limited product momentum.

The luxury segment, while small in absolute terms, continued to grow steadily in FY26. Mercedes-Benz India remained the market leader with 18,160 units, followed closely by BMW India Pvt Ltd at 17,301 units. Jaguar Land Rover India Ltd and BYD India Pvt Ltd also posted incremental gains, reflecting rising demand for premium SUVs and electric vehicles.

According to JATO Dynamics India, among luxury passenger vehicles, Mercedes-Benz’s E-Class emerged as the highest-selling model in FY26, with sales rising 22.3% year-on-year to 4,350 units. The standout performer, however, was BMW’s electric SUV iX1, which recorded a sharp 378% surge to 3,210 units, highlighting the growing traction for EVs in the luxury space. Mercedes-Benz also saw steady demand for its SUVs, with the GLE growing 11.5% to 3,069 units and the GLS remaining largely stable at 2,791 units. Meanwhile, BMW’s 3 Series sedan posted modest growth of 3% to 2,753 units.

Body Styles and Powertrains

The market is also increasingly splitting into two distinct cohorts: value-conscious buyers at the entry level and experience-driven consumers willing to pay a premium, forcing OEMs to recalibrate product strategies across price bands.

“You need different products for India 1 and India 2. Those who are reading the market correctly are the ones succeeding,” Bhatia noted.

If FY26 had a defining theme, it was the continued dominance of SUVs. The body style now accounts for over half of all PV sales, reshaping the structure of the Indian car market.

Consumers are increasingly prioritizing higher ground clearance, better road presence, and feature-rich vehicles. As a result, hatchbacks continued to lose share, particularly in the entry-level segment. Sedans, mini MPVs, and vans saw steady demand, while niche categories such as coupes and convertibles remained small.

The shift was even more visible in the fuel mix. Petrol/ethanol vehicles continued to dominate but saw their share decline to 47.48% from 50.82% in FY25, indicating a gradual diversification. Diesel remained stable at around 18%, while CNG/LPG saw a rise to 21.98%, driven by lower running costs and improved availability.

The rise of CNG has also been closely linked to fleet demand, with segments such as taxis and shared mobility driving a significant portion of volumes, supported by faster replacement cycles and favorable operating economics.

Hybrids accounted for 8.22%, while EVs continued to gain traction, with their share rising to 4.25% in FY26 from 2.61% a year ago. Customer preference for greener technologies gained further momentum in FY26, with EV volumes growing 84% year-on-year to 1,99,923 units, as per FADA data.

However, EV adoption remains uneven. “EV penetration in the sub-Rs 10 lakh segment has actually declined, which shows that affordability remains a key constraint,” Bhatia said.

Beyond pricing, practical challenges around usage continue to weigh on EV adoption. “Charging infrastructure is still not convenient enough — availability is one thing; usability is another,” he added.

The shift toward alternative powertrains reflects a broader change in consumer behavior. “India is no longer just a value-for-money market. Buyers today are looking for experience, technology, and aspiration,” Bhatia said.

Buyers are increasingly evaluating the total cost of ownership rather than just the upfront price, especially in a high fuel-cost environment due to emerging geopolitical tensions.

The transition to E20 fuel has also introduced new considerations for consumers, with concerns around real-world efficiency and long-term engine performance influencing buying decisions.

According to JATO Dynamics India, petrol vehicle sales remained largely flat at 26,06,118 units in FY26 compared to 26,04,939 units a year ago. In contrast, CNG vehicles recorded strong traction, with sales rising 23.3% year-on-year to 10,21,156 units, driven by lower running costs and wider availability. Diesel also saw a healthy rebound, growing 10.2% to 8,80,735 units, supported by sustained demand in SUVs and utility vehicles.

Outlook for FY27

As the industry moves into FY27, sentiment remains cautiously optimistic. According to FADA, nearly 75% of dealers expect growth in the 3-7% range, indicating confidence in the underlying demand story. However, risks remain.

“While the growth outlook for FY27 remains positive, it is likely to be more measured. With several macroeconomic headwinds beginning to emerge, there is a slight downward revision; we expect the PV market to grow by 5% to 7% from an earlier guidance of 3% to 5%,” added Thakkar. (Note: You may want to review this quote with the author, as a change from 3-5% to 5-7% is technically an upward revision, contradicting the word "downward".)

Geopolitical uncertainties, particularly in West Asia, could disrupt supply chains and impact production schedules. Rising fuel prices and a broader economic slowdown are also key concerns.

Rising input costs, particularly in energy and raw materials, are also beginning to strain supplier ecosystems, especially at the Tier 2 and Tier 3 levels, potentially impacting production economics in the coming quarters.

“Increasing input costs, particularly in energy and commodities, are beginning to put pressure across the value chain, especially for Tier 2 and Tier 3 suppliers,” said Thakkar.

At the same time, the accelerating shift toward EVs and CNG vehicles is expected to continue. Over 56% of dealers report increasing customer interest in these powertrains, suggesting a structural transition in the market.

“Looking ahead, industry momentum is expected to sustain, led by growth in SUVs, CNG, and EVs. At the same time, the industry will need to closely monitor geopolitical developments to mitigate potential supply-side risks. For Tata Motors Passenger Vehicles, we expect to build on the strong momentum of H2 and continue to deliver industry-beating growth in FY27, supported by recent launches, a strong pipeline of new products, and an established multi-powertrain strategy,” said Chandra.

“We stay mindful of the prevailing geopolitical uncertainties; Hyundai Motor India Limited is well-prepared for a strong FY2026-27, delivering aspirational, connected, and innovative products,” TarunGarg, MD & CEO of HMIL, said.

Automakers, too, are preparing for the next phase of growth. Tata Motors is expanding its EV lineup with upcoming launches such as the Sierra EV and Safari EV. Hyundai is banking on product refreshes and new launches, including its EV push, to regain momentum. Honda Cars India is also set to enter the EV space with its first battery electric vehicle.

A Year of Transition

FY26 will be remembered not just for its record volumes but for the shifts it triggered.

It was a year where policy intervention, particularly GST 2.0, played a decisive role in reviving demand. It was also a year where the market’s center of gravity moved further toward SUVs and alternative powertrains. More importantly, it marked a change in competitive dynamics. Mahindra and Tata have emerged stronger, while Maruti and Hyundai face the challenge of realigning their portfolios with a rapidly evolving market.

While FY26 delivered record volumes, a significant part of the growth was underpinned by policy support, pricing interventions, and replacement demand. This raises questions about how sustainable this momentum will be as these tailwinds begin to normalize—particularly as the West Asia crisis fuels inflationary pressures, strains supply chains, and risks dampening demand through rising prices.

“The momentum seen in the second half of FY26 may not fully sustain as some of these supporting factors begin to normalize,” Thakkar opined.

As the industry steps into FY27, the outlook is more measured, even as the sector remains on course to approach the 5-million annual sales mark over the medium term. SIAM, the industry body, has guided for 5–7% growth, though a downward bias is emerging amid the protracted West Asia crisis, which is expected to impact input costs, supply chains, and pricing.

“The industry is clearly moving toward the 5-million mark, but getting there will depend on how demand holds up amid rising prices and macro uncertainties,” said Bhatia.

These pressures are likely to temper momentum, requiring automakers to carefully balance both cost and demand in the year ahead.