New Delhi: The automobile manufacturers are rejoicing in the unprecedented growth of wholesale dispatches from factories last fiscal. Dispatches of vehicles, especially of passenger cars, reached an all-time high. Other vehicle segments have also fared better than expected, despite the comparison being on a high base of previous years.
But this euphoria in factory dispatches masks the anxiety at the retail showrooms, where discounts are at unprecedented levels across price segments, particularly for the entry level cars and two wheelers, as sales remain weak.
In this scenario, the decision of the Monetary Policy Committee this morning to keep lending rates unchanged at 6.5% would continue to badly impact the retail sales of all vehicles, especially entry level vehicles. The typical buyers of small cars and lower end bikes are extremely price sensitive. Given the continued inflationary trend without any relief in finance rates, these prospective buyers may continue to hesitate.
“After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, it decided by a 5 to 1 majority to keep the policy repo rate unchanged at 6.5%,” Shaktikanta Das, Governor of the Reserve Bank of India, said.
Das pointed out some green shoots. He said rural demand, which was lagging urban demand earlier, picked up since Q2 (July-September) 2023-24. Rural markets account for a sizable portion of sales of entry level cars and bikes in India.
“This is also suggested by performance of indicators such as two-wheeler sales (30.% growth during January-February), MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) demand (declined by 9.8% year-on-year during February-March 2024) and retail tractor sales (increased by 16.1% in January-February)…With rural demand catching up, consumption is expected to support economic growth in 2024-25. Urban consumption stayed buoyant,” Das said.
But are these green shoots enough to ensure growth in the new fiscal year? Even in a remarkable year (2023-24), two wheeler sales did not race past pre-Covid highs, pointed out Nikunj Sanghi, past President of the Federation of Automobile Dealers Association (FADA). Stress at the entry level segment continues to impact sales of a large chunk of vehicles.
According to data from the Society of Indian Automobile Manufacturers (SIAM), just entry level motorcycles (between 110-125 cc, excluding scooters and mopeds) accounted for nearly 18% of total two wheeler sales in the domestic market between April and February last fiscal. In passenger cars, the micro segment accounted for about 3% of overall car sales though this segment was nearly a third of the market some years ago.
Many industry experts have pointed out that continuous price hikes, specially post Covid19, have shrunk the entry level segments in both, two wheelers and cars, besides also having a significant impact on two-wheeler owners willing to upgrade to cars (the first time buyers in many cases). An industry executive said the entry hatchback segment in cars “has shrunk badly as car affordability for this section of the consumer is a big issue”.
In two wheelers, while the entry level segment did start showing some green shoots late last calendar year, the growth has been very slow. Though the general trend in cars as well as two wheelers is towards premiumisation, volumes remain in the entry level segment in two wheelers. The auto industry has been seeking lower GST on entry level two wheelers and more measures from the government to increase the income levels of the target customers for such vehicles.
Auto industry runs on finance:
Sanghi said that the automobile industry moves on finance “and the RBI decision to hold rates is a disappointment for prospective entry level car customers.” At least 9 in 10 vehicles sold in the domestic market are financed. The interest rates are levied on the invoice value (ex-showroom price, does not include road tax and insurance). Sanghi said that if the CIBIL rating of the customer is good (750+ points) then the current interest rate for a small car purchase is 9.5%. But for the same car, it can go up to 11.5% if the customer’s CIBIL rating is poor. For two wheelers, finance rates are nearly double those for cars. “The two wheeler rates are nearly double of those for cars since the loan amount per vehicle is lower and administrative and collection costs for such deals are higher”.
Besides, banks offering vehicle loans do not often have the margin to reduce interest rates as provisioning requirements (by the RBI) have been getting tougher by the day. Sanghi said even now, banks have not passed on the entire rate cut relief (for an earlier cut in lending rates) for the automobile segment.
So, in all, the decision of the MPC to retain lending rates is no music to the ears of prospective entry level vehicle buyers.
But Saurabh Agarwal, Partner at EY, did not see any major impact on entry level segments in different vehicle categories due to the RBI decision to hold rates. One, he said, this was expected since the MPC meeting was being held just before the General Elections. “Anyway, spending in India is increasing as is India’s per capita income. There is unlikely to be any major impact on vehicle sales”.
Meanwhile, V G Ramakrishnan, Managing Partner at Avanteum Advisors, said vehicle finance rates will hold steady for the time being. “But what is also of importance is the risk weight attached to retail assets and vehicle loans as a class of asset. The risk weightage also plays a role in interest cost.” He pointed out that in the recent past, RBI has been worried about retail loan default, in particular credit card leverage.
So what is the forecast for auto sales in the new fiscal year? Ramakrishnan said that after Covid19, there was good growth in sales “but that will slow down now as the pent up demand has been fulfilled. There will be a short period of consolidation but if the GDP continues its robust growth, vehicle sales will bounce back next year.”
