The Hindu Business Line : Interest rate hike may slow down car purchases

Mumbai April 9 2006 was a record breaking year for the auto industry. The industry posted its highest-ever sales of 1.3 million vehicle units with a 24 per cent year-on-year sales growth rate.

Will the current fiscal see a repeat? No tax soaps were announced in the Budget 2007-08.

No news for the auto industry was as good as bad or no good news as there were expectations from the Finance Ministry to push the current growth rate.

Now comes higher interest rates with auto loans priced by banks at 15.5 per cent against 14.5 per cent.

Sales growth could drop to 12 per cent from 24 per cent last year, predict analysts.

Though corporates and high net worth individuals would not stall their purchases, it is the individual whose purchase decision may be deferred by a couple of months.

Buyer categories

There are three categories of individuals who can be termed prospective car buyers.

First and foremost is the first-time buyer, who is largely not affected by the interest hike due to his demographic need.

Second is the buyer who has a car but would like to have a second. He is not likely to wait.

The last is the existing owner of a vehicle who is opting for a swap in vehicle brands; the prospective buyer is most likely to wait till he gets the best buy possible.

In addition, there is the growing list of individuals with a recurring EMI nibbling the balance sheet. With an additional burden of a car loan at rising interest rates, the buyer tends to delay the purchase to lessen the loan burden.

But all this could be negated by the buoyancy in the auto market as there is a growing demand for vehicles.

Around 25 car launches are expected in the current fiscal and the novelty factor could insulate demand from the rising cost of money, said Mr Ramesh Iyer, Managing Director, Mahindra Finance.

Auto majors are likely to offer attractive finance schemes, discounts and freebies to lure the prospective customers, he added.

In certain novel and interesting cases, market-savvy customers have opted for finance schemes from nationalised banks (for e.g. Canara Bank), that do not play a major role in the auto finance sector, said dealers.

These banks have offered finance schemes with the difference in EMIs being Rs 3,000 between the private and public sector banks.

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