Dalal Street Investments

Rising Interest Rates Impact on Automobiles

January 17, 2011

With Inflation refusing to calm down, the meek RBI Governor is expected to take some bold steps in the forthcoming Policy Review on the 25th. In expectations of some hard monetary measures, the Auto Index has fallen by 10% since the beginning of Jan-2011.

The auto sector will not escape the impact of slower economic growth, which may be the collateral impact of interest rate hikes, we set out to isolate the real impact of interest rates on auto volumes. Auto volumes in the consumer-driven segments (cars and two-wheelers) are historically correlated much more to liquidity (availability of financing) than to a 50bp or a 100bp hike in interest rates. Similarly, liquidity and cyclicality of commercial vehicles (CV) overlay any interest-rate impact on CV volumes.

Consider a small 100bp increase in interest rates would increase monthly repayments of cars and two-wheelers (2W) by only 1.5% and 1.3%, respectively. This translates into INR151/month for low-end cars (average price: INR400,000) and INR17/month for a low-end 2W. Adding to the woes of these Buyers is the cost of Fuel – Petrol which now stands at Rs 65 / Litre. Thus we conclude by expecting the Volume Growth which was at 25% to come down to a modest 15-18% in the forthcoming quarters with the above assumption of RBI’s rate hikes and no the external factors into account yet.


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