Interest rate cuts not to boost festive season auto sales: India Ratings

Says freeing up of petrol prices and the monthly increase in diesel prices has resulted in a drag on auto sales

The recently announced reduction in auto loan interest rates by certain public sector banks is not likely to have a meaningful impact on auto sales, India Ratings said in a report today.

According to India Ratings, auto sales during the October to December 2013 festive season would not be influenced by the prospect of lower interest costs.

"This is mainly because the overall cost of ownership is high and continues to rise steadily due to the frequent rise in fuel prices," the report said, adding that the freeing up of petrol prices and the monthly increase in diesel prices has resulted in a drag on auto sales.

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, the report said.

In October 2013, some public sector undertaking (PSU) banks announced around 20 basis points cut in interest rates for autos, with the rates now in the range of 10.45% - 10.75% for auto loans up to three years for purchase of new vehicles.

Moreover, the government has also decided to increase the quantum of capital infusion over the Rs 14,000 crore already allocated in the FY'14 budget, in a bid to encourage lending by banks and spur the purchases of autos and consumer durables in the following festive season.

Ind-Ra believes there is limited scope for banks to reduce interest rates further considering that the Reserve Bank of India raised the repo rate to 7.50% from 7.25% on September 20, 2013.

Meanwhile, with the landed cost of imported components rising significantly in the current financial year due to rupee depreciation, several auto companies have been compelled to raise prices to pass at least a part of the input cost increases to consumers.

The cost increases announced by most auto companies around September-October 2013 have been in the range of 1-5%.

The discounts offered in the next couple of months, therefore, will not translate into significant cost savings when compared with prices in August 2013.

Hence, the limited monetary incentive in a scenario of negative consumer sentiment may also curtail sales in the festive season, the report said.