No rate cut disappoints auto players

Vehicle manufacturers and dealers struggling against the sharp slide in demand for new cars and motorcycles felt disappointed when the central bank today did not cut key rates thereby ruling out any possibility of lowering of interest rates by banks.

Car sales declined for eight straight months in June, weighed down by costly loan rates, expensive fuel, hiked vehicle prices and general inflation. Sales are mostly surviving on new products of on discounts across the sector.

The Reserve Bank of India (RBI) kept the rate unchanged at today's monetary policy providing no window of opportunity for banks to ease interest rates on vehicle loans. Car makers are forced to offer discounts ranging from 10-15% of the value of the vehicle to keep retail sales going.

"Though a 25 basis points rate cut would have meant little to the industry as it is reeling under a variety of problems but it could have been a start of an ease", said a senior executive of a Delhi-based car making company.

The first three months saw a fall of more than 10% in sales of cars at 434,551 units as against the same quarter last year, according to data provided by the Society of Indian Automobile Manufacturers.

The fall in medium and heavy trucks has been steeper at 18% during the quarter thereby pushing value of discount offered to all-time high. Tata Motors which has a 62% market share of the MHCV segment reported a fall of 11% in sales during the April-June period.

The auto industry is thus seeking a stimulus package similar to what was seen in end of 2008 when the government had proactively cut excise duties twice within a month. This had led to a revival in demand across all the segments.

The Central Board of Excise and Custom last week removed three sedans from the category of of sports utility vehicles which are carrying a higher excise duty. The rates on these sedans was brought down to 27% from 30%.  

The two-wheeler segment has performed slightly better than the rest of the industry especially the motorcycle segment reporting a comparably lower decline in sales. Manufacturers say that rural demand and the general sentiment needs to improve for sales to get back on growth tracks.

K Srinivas, president (motorcycle business), Bajaj Auto said, "Motorcycle sale are more impacted by rural economy rather than interest rates. General sentiment is still weak but a good monsoon so far is positive."

Motorcycle sales dipped by four% during the first three months of the year at 2.52 million units as compared to 2.62 million units sold in the same period last year. The entire two-wheeler segment reported a fall of under one%.

Industry players believe that a one-off rate cut will not provide any fillip to the situation. "Everybody is sees rate cut important but there is no way the RBI can cut rates. Even a 25 bps cut would not make much impact on demand. Rates have to come down consistently over a period of time to drive back demand", said an analyst.