The Reserve Bank of India (RBI) kept rates unchanged for the seventh consecutive quarter at 6.5%. This impact has however has not yet been completely passed on by banks to the customers in the automotive industry, this is due to the fact that the vehicle loans usually see a significant lag in terms of revision.
The average interest rate on a vehicle in India depends on the segment, ownership (new or used) and the lending bank. At present for a four-wheeler car loan the interest rates start at around 9 percent and increases based on various factors – brand, partner bank, personal credit history, etc.
Given the current macro-economic situation, very few industry trackers were hoping that there would be a rate cut given the high inflation, including food inflation.
While the vehicle loan amounts have grown significantly over the course of the last few years, the auto retail sales has kept growing significantly. But a closer look at the numbers reveals that while the sales of high-end vehicles and premium models (two-wheeler and four-wheeler) has seen double-digit growth, the mass-market entry-level segment has been the one under pressure.
In an interaction with Financial Express Online, Shashank Srivastava, Senior Executive Officer, Marketing and Sales, Maruti Suzuki India said, “At present, almost 80% of new vehicle sales are on credit. RBI’s stance of not changing the repo rate was expected by the industry given the macroeconomic conditions especially the inflation. In terms of the interest rates in the automotive sector, there is usually a lag between the time the revision in repo rates, and the actual passing on of the same by the banks to the customers. For instance, the last hike in repo rate has not yet fully been passed on by the banks to the customers.”
Anurag Singh, MD, Primus Partners stated that “Indian new vehicle buyer has to pay more and more on account of vehicle base price increase, high taxation, high interest rates & high fuel costs. Still the sales numbers are buoyant, and the customers are actually shifting to higher priced vehicles.”
Singh further added that the repo rate has not been changed for past 6 times, “however, at 6.5%, the repo rate is at the higher end of past 5 year range. It used to be just 4% in 2020 and 2021 hence financed through organized lending. Hence majority of the new vehicle buyers are affected by higher EMI payments. “
Manish Raj Singhania, President, FADA too shared a similar view. “Looking at the inflation, macroeconomic and global situation, we understand that the Reserve Bank of India (RBI) does not have the luxury of passing on rate cuts in the near-term. But if the automotive industry, especially the entry-level mass market two- and four-wheeler segment needs to be revived, there will be a need to reduce interest rate on auto loans. FADA has also been urging the government to revisit GST rates on entry-level vehicles, at least to begin with the two-wheeler segment, which have been under pressure for long.”
Going forward, Singhania believes that the RBI and the government “whenever it is possible, can look at having a differentiated interest rate for the mass-market segment vehicles and premium vehicles. The entry-level buyers already have a lot of loans on their head, and any relaxation would mean more disposable income in their hand, and in turn higher contribution towards the economy. This will only benefit the country in the long run.”
“Going forward if inflation comes under control, the government’s expenditure on food subsidy reduces and the oil prices remain stable, we expect the RBI to reduce the repo rate. The passing on of rate cut (if any) will also happen through a lag, reduction in retail loan rate should benefit the car industry generally speaking but the entry level vehicle buyer specifically will benefit more since the demand elasticity in that segment with respect to affordability is the highest,“ concluded Srivastava.
