Interest Rate Cut Will Not Turbocharge Auto Sales - India Ratings

Mumbai, October 15, 2013: India Ratings & Research (Ind-Ra) believes the recently announced reduction in auto loan interest rates by certain public sector banks will not have a meaningful impact on auto sales.

In October 2013, some public sector undertaking (PSU) banks announced around 20 basis points cut in interest rates for autos, with the rates now in the range of 10.45%-10.75% for auto loans up to three years for purchase of new vehicles. This follows the government’s decision to increase the quantum of capital infusion over the INR140bn already allocated in the FY14 budget. This capital infusion was intended to encourage lending by banks and spur the purchases of autos and consumer durables in the following festive season.

However, Ind-Ra believes auto sales during the October to December 2013 festive season will not be influenced by the prospect of lower interest costs. This is mainly because the overall cost of ownership is high and continues to rise steadily due to the frequent rise in fuel prices. The freeing up of petrol prices from June 2010 and the monthly increase in diesel prices permitted from January 2013 has resulted in a drag on auto sales. The reducing price difference between petrol and diesel has led to a slowdown in demand for diesel vehicles which were largely responsible for driving passenger vehicles (PV) sales in FY12 and FY13.

The 3% hike in excise duty to 30% on utility vehicles (UV) over 4m in length and over 1,300cc engine capacity (announced in the March 2013 budget) has also dampened sales. While this segment registered a 52.2% yoy sales volumes growth in FY13, there was a 4.8% yoy decline in sales volumes over April to September 2013. A large proportion of volumes in this segment are contributed by entry level UVs, sales of which have also been adversely impacted by higher on road prices due to the excise duty hike.

According to the RBI Consumer Confidence Survey - June 2013, only 12.8% of respondents wanted to purchase a vehicle compared with 15.9% in March 2013 and 19.7% in December 2012. This seems to suggest a steadily worsening consumer sentiment which could negatively impact sales over the next few months. The J.D.Power Survey, released on 29 August 2013, suggested that more price conscious, middle class buyers are considering buying a used vehicle instead of a new one. Ind-Ra believes this is due to the growth of the organised used car market in India along with the presence of major original equipment manufacturers (OEMs).

Ind-Ra believes there is limited scope for banks to reduce interest rates further considering that the Reserve Bank of India raised the repo rate to 7.50% from 7.25% on 20 September 2013. The revision follows four consecutive reductions in the interest rate from 17 April 2012 to 3 May 2013. During this period, passenger car sales, which declined in FY13, did not demonstrate a significant co-relation with interest rates.

With the landed cost of imported components rising significantly in the current financial year due to rupee depreciation, several auto companies have been compelled to raise prices to pass at least a part of the input cost increases to consumers. The cost increases announced by most auto companies around September-October 2013 have been in the range of 1%-5%. The discounts offered in the next couple of months, therefore, will not translate into significant cost savings when compared with prices in August 2013. Hence, the limited monetary incentive in a scenario of negative consumer sentiment may also curtail sales in the festive season.

(Source: Corporate Communications and Investor Relations, India Ratings & Research  A Fitch Group Company)