Living in interesting times

Last week, the Reserve Bank of India unexpectedly raised its base interest rate by 0.5 percentage points in a bid to tame stubbornly high inflation in the country. This is the eleventh consecutive increase in the base rate, also called the repo rate, during the past 18 months. Since April 2010, this benchmark interest rate has increased significantly from 5.25 per cent to 8 per cent, perhaps the most rapid rise seen in recent times. Immediately following this RBI announcement, many banks announced similar increases in their lending and deposit rates.

How does such a significant and speedy rise in interest rates impact consumer sentiment and behaviour? Does it impact various consumer segments differently? Can marketers leverage such impacts to their advantage? There are several interesting effects, both direct and indirect, which are interesting to the marketing fraternity, and some of them can indeed be leveraged smartly.

The EMI effect

The first and most direct effect of increased interest rates is an increase in EMIs (equated monthly instalments) on loans. To illustrate, if a young professional had taken a loan of Rs 10 lakh from a bank to buy an apartment, the monthly EMI he has to pay would have increased by approximately Rs 3,000 during the past one year. This creates both a psychological and real impact on consumers. The consumer feels suddenly burdened by the increased interest rate, and in the short term this may even lead to a feeling of helplessness, also a view that the world is treating him unfairly for no fault of his at all. All this ends up making him less happy, hence he is less likely to pursue discretionary pastimes or purchases. In real terms, the higher EMIs mean that he now has less disposable income per month, hence he will have to cut down on other expenditure to make ends meet. This effect is most pronounced amongst the middle-class and lower middle-class, where budgets typically are stretched every single month.

Deferral of purchases

Even if a consumer does not have an existing loan, the increase in interest rates and, therefore, higher EMIs will result in his thinking doubly carefully before assuming a new loan, say, for the purchase of a new car or motorcycle. At the end of such deliberation, many consumers will reach the inevitable conclusion that they should defer this purchase, and live with their old vehicle for a year longer, or continue to use public transport for a few months more. Hence, in all product categories which are normally purchased on loans or instalments, growth of consumer demand will be far more muted in the coming months, compared to the previous year. Marketers should, therefore, keep a close watch on inventories, which can balloon out wastefully unless prompt action is taken. Also, deferral of purchase leads to use of older products for longer durations, which can in turn create enhanced opportunities for revenues from servicing and repairs.

Trading down

Some consumers may not defer purchases altogether, but may trade down to less expensive products, so that their EMI outflows still remain manageable. This will result in greater demand for smaller cars, or for less luxurious apartments. Marketers can actively trigger this mindset amongst consumers, by highlighting their “value for money” products, and how these can constitute an intelligent purchase.

Alternatively, marketers can help consumers purchase these items by agreeing to bear some part of the higher interest costs, or by offering more friendly EMI options. This is a trade-off between short-term profit margins and sales volumes, and companies which are highly leveraged to fixed costs or large capacities can benefit by actively evaluating and putting forward such offerings.

Discount shopping

As consumers with loans end up having less disposable income when interest rates go up so rapidly, they will actively shop for discounts on all other discretionary products they wish to buy — be ita shirt, a television set or a more powerful laptop computer. Also, because many consumers can wait for at least a few weeks before they make purchases of such discretionary goods, they will therefore wait for announcement of discount offers by brands and retailers. The year ahead is, therefore, likely to be an excellent period for attractively packaged consumer promotions.

On the other hand, consumers cannot wait similarly to buy their requirements of FMCG staples, such as toothpaste or soap, which are required at home everyday. Therefore, in such weekly or monthly purchase categories, down-trading to lower priced brands is far more likely, rather than shopping for discounts.

Small indulgences

Here is an indirect impact worth taking note of. Consumers who defer purchase of large indulgences (a new car, a new plasma screen television, a foreign holiday ) because of the significantly higher EMIs involved may seek happiness in smaller indulgences which are still affordable — such as a restaurant meal, or a new handbag, or a wristwatch. The insight here is that people actively seek happiness at all times and regardless of whether interest rates and their disposable incomes have moved up or down. Marketers can leverage this behaviour smartly, to create a win-win equation for consumers and for their brands.

Inclination to save

On a very different subject, significantly higher interest rates will lead to a naturally higher inclination to save money, either in fixed deposits or in any other interest-bearing instruments. There would be a marked preference towards these financial products, and a discernible shift away from capital markets, particularly because higher interest rates are generally seen as adversely impacting the performance of companies listed on these bourses. It would be interesting to study in further detail consumer behaviour relating to threshold nominal and real interest rates which prompt saving and dis-saving in various financial products.

Many consumers are also keen to “lock in” their savings at high interest rates for the long-term, before rates comes down once again. Hence, amongst such people, there is likely to be a distinct preference for longer-term fixed interest bearing deposits and similar products. For banks, this is an opportunity to reach out to their consumers, and proactively offer many such solutions, which make them feel that the bank is batting for them. Such marketing actions can also help develop consumer loyalty.

Non-Resident remittances

Non-resident Indians, as well as other non-residents, will now be attracted by the higher interest rates offered on the Indian Rupee, particularly since interest rates in Europe and the US, which are struggling with growth, continue to be very low. This has the potential to lead to much higher remittances into Indian banks, and is once again a very good opportunity for smart marketing of Indian financial products, directly to NRIs and also indirectly to their families based in India.

To conclude, marketers and students of marketing should understand and appreciate the wide-ranging impact on consumers, of the change in a single economic variable — the interest rate. Any such significant change leads to consumers modifying their purchase behaviours, and throws up both challenges and opportunities which may vary across product categories. It is then up to us to leverage what works best for our markets.

Harish Bhat is Chief Operating Officer – Watches, Titan Industries Ltd. These are his personal views.

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