With growth in the automobile industry already seen slowing down in the first quarter of the current financial year, a further 25-basis points increase in rates by the Reserve Bank of India (RBI) on Thursday is expected to further dampen demand.

From a volume growth of 30% last year, the auto sector is expected to settle for a single digit growth in the first quarter. In the two months of this financial year, the industry has witnessed a total growth of 11%.

?Around 70% of the car buying happens on auto loans in the country and the increase in rates would definitely have an impact on demand, especially small cars. Small cars are most vulnerable to change in rates,? said Mayank Pareek, managing executive officer (marketing and sales), Maruti Suzuki India (MSI). He added that the company will soon be able to restrict impact of the ongoing strike at its plant in Manesar but interest rates remain a concern. To put things into perspective, auto loan rates are now seen at 12-13% from 10-11% a year back.

This comes at a time when the industry is witnessing high petrol prices and high commodity prices, leading to increase in vehicle prices. Furthermore, auto companies have been running attractive offers on their petrol models and working with banks to offer better interest rates to revive demand of these vehicles.

?Auto loans have seen an increase of around 200 basis points over one year. The latest 25 basis points increase in the rates by RBI has not changed the overall outlook of the automobile industry, that is expected to witness a volume growth of 14-15% this financial year. The growth outlook remains intact until the next round of rate hikes come in,? said Mahantesh Sabarad, a senior analyst at Fortune Equity Brokers.

He added lenders may want to absorb this increase and not pass it on. However, it is learnt that banks are looking at passing on the increase in rates to end customers.

Talking about the possible impact on the commercial vehicles market, Vinod Aggarwal, chief executive officer, VE Commercial, said, ?The CV market is 100% dependent on retail financing and any increase will lead to pressure on cost and margins of these buyers, who in turn may look at increasing freight rates. The impact on demand will be dependent on whether the freight rates are increased or not and whether overall economy moves as per the estimates. Further, the impeding hike in diesel price is also staring at the industry.?