Interest rate cut and festive season will not increase auto sales- Ind-Ra

India Ratings Research (Ind-Ra), a rating company said that the discounts offered by some public sector banks will not have a meaningful impact on the sales of auto sector. Also, festival season too will not help enhance the auto sales.

This month, PSU banks cut the auto loan interest rates by about 20 basis points, bringing the loans rates in the range of 10.45%-10.75%. The rating company further said that 'festive season will not be influenced by the prospect of lower interest costs.' 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.

Speaking of the reason of decrease in auto sales, it said that "The overall cost of ownership is high and continues to rise steadily due to the frequent rise in fuel prices." Also, 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.

Petrol price decontrol and the monthly rise in diesel prices have further brought the auto sales down. Moreover, almost all the automakers have raised their vehicle prices by up to 5% in September-October. "The discounts offered in the next couple of months, therefore, will not translate into significant cost savings when compared with prices in August 2013," It said.

Revealing some very important figures, it further said that the 3% hike in excise duty to 30% on utility vehicles over 4 metre in length and over 1300cc engine capacity, announced in March 2013 budget has also hampered sales. While this segment registered a 52.2% yoy sales volumes growth in 2013, there was a 4.8% yoy decline in sales volumes over April to Setpember 2013.

According to RBI's 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 suggests a 'steadily worsening consumer sentiment', which could negatively impact sales in coming months. The report further talks about the J.D. Power Survey, released last month, according to which more price conscious, middle class buyers are considering buying a used vehicle instead of a new one. Ind-Ra believes that this is because of the growth of the organised used car market in India. There are major OEMs too in the used car market.

The report further said that there is a limited scope for banks to reduce interest rates further, considering the recent repo rate revision to 7.50% from 7.25% earlier. 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.