Mumbai: Rising interest rates and higher car prices could hit consumer sentiment this festival season, even as demand is likely to be subdued in Kerala, where the worst floods in more than a century have left more than 380 people dead, according to dealers and auto company executives. Barring July, car sales have grown at a fast pace since January on the back of a recovery in rural demand and a slew of product launches and upgrades.
Car sales in India are considered as factory dispatches to dealerships. Auto makers may have to trim dealer inventory if retail demand fails to keep pace.
The festival season, which started with Onam this month and will end with Diwali in November, is crucial for companies as consumers traditionally consider it auspicious for big-ticket purchases such as cars.
Factors such as two straight RBI repo rate hikes in June and August and nine straight months of retail inflation above the central bank’s medium-term target of 4% are likely to affect consumer sentiment, said executives at dealerships.
“Enquiries have reduced by about 20% compared to the same period last year as consumers are concerned about uncertain fuel and food prices. We are expecting a subdued festive season despite new launches,” said a Honda Cars India Ltd dealer in New Delhi, adding that about 40% of car buyers take loans.
A Maruti Suzuki Nexa dealership executive in western Mumbai concurred. “Enquiries and footfalls are marginally lower than last year, though we have high expectations owing to new products and festive schemes. There is a delay in intent to purchase because even car prices have risen,” the executive said.
The Reserve Bank of India’s (RBI) June consumer confidence survey of over 5,000 individuals in six metropolitan cities found that 83% of respondents believe prices would rise 12 months from now, with only 48.2% of respondents expecting general economic conditions to improve a year hence. As many as 27.7% expect economic conditions to worsen.
In its August monetary policy, the Reserve Bank of India retained its neutral policy stance, citing uncertainty on the future course of inflation because of volatile food prices and the central and state governments’ pay commission decisions, thus reducing the prospect of a near-term rate cut.
N. Raja, deputy managing director at Toyota Kirloskar Motor Pvt. Ltd, said the current consumer sentiment is a “challenge” since “rates are going up and most car customers have home and car loans”, but he expects rising rural and urban incomes to support demand.
“It’s all sentimental even though the rate hike is not that large. Slowly it is hitting (sales),” Raja said. He expects a “big sentiment challenge” in Kerala where sales tend to “at least double” during Onam.
Others such as Honda, Hyundai Motor India Ltd and Mahindra and Mahindra Ltd generate 5-10% of sales from Kerala but are bullish on the rest of the country on the back of new launches, near-normal monsoons and a hike in the minimum support price for key crops.
“Interest rates going up can be a dampener to demand, and will pan out over some time,” said Rajesh Goel, senior vice-president and director of sales and marketing at Honda.
He said the company is still “very bullish” on the festive season due to new launches such as the Amaze sedan and CR-V sport-utility vehicle.
Mahindra, too, is “confident of seeing increased traction in the overall buying sentiment” on the back of new launches such as the Mahindra Marazzomulti-utility vehicle and good rainfall, said Veejay Ram Nakra, senior vice-president of sales and marketing at the automotive division.
Analysts, too, are wary of rising fuel prices and interest rates playing spoilsport.
“These factors are definitely a concern, there could be some moderation in sales compared to last year because of rising fuel prices and interest rates,” said Shruti Saboo, associate director, India Ratings and Research, adding that high-volume entry-level cars (where Maruti Suzuki India Ltd is the market leader), would be “worst affected” due to higher price sensitivity.
However, rising incomes across the board and new launches would be positive factors, she said.