Interest rate cut too little to revive demand: car makers, lenders

The 0.25% point cut in interest rate is too small to revive demand, say car manufacturers and lenders. Manu P Toms reports.

The 0.25% point cut in interest rate is too small to revive demand, say car manufacturers and lenders.

Following a cut in policy rates and cash reserve ratio by the Reserve Bank of India last week, many lenders have reduced interest rates for auto loans. However, the market mood is still unenthusiastic.

"For a car loan of 4 lakh for a three year-tenure, the 25 basis point cut would mean reduction of 50 in the monthly installment. This isn't enough to bring customers back to showrooms," said Sumit Bali, director, Kotak Mahindra Prime, the car finance arm of private sector lender Kotak Mahindra.

Most of the car makers including market leaders Maruti Suzuki and Hyundai saw flat growth in the recent months while some including Tata Motors suffered sharp fall in sales.

"The interest rate cut may not immediately propel demand," said Rakesh Srivastava, vice-president, marketing, Hyundai Motors India.

"Any stimulus is good for the industry. The only question is how much 25 basis point cut can revive demand," said Neeraj Garg, vice-president, Tata Motors.

Companies are dolling out huge discounts indicating high dealer inventory and poor retail demand.

"With discounts and rate cut, it is a good time to buy cars. But the absence of any major positive news on macroeconomic front and high inflation make people hesitant to spend money on a discretionary item like car," said Bali.

Kotak Mahindra Prime had cut rates by 0.25% point in January in anticipation of RBI reducing key policy rates.

"But we didn't see any significant increase in loan demand," Bali added.

Auto finance has been a significant factor that drives car sales. In the high interest rate regime that continues for about two years, the customer interest in auto loans has significantly fallen. From 75-80%, the cars purchased using loans came down to 65-70% while car sales flattened out.