Rising Interest rates are Massacring The Automobile industry but players are hoping that the upcoming Festive Season will reverse the sluggish trend. Well, will it?
Interestingly, the two-wheeler segment is apparently less affected by the hike in interest rates, despite the fact that the demand elasticity was supposed to higher in this segment. For example, two-wheeler manufacturers like Hero MotoCorp, Bajaj Auto, HMSI & TVS Motor have posted a rise of 15%, 14%, 10% and 12% respectively in unit sales during the month of July. Given this dichotomy, car makers (like GM’s Sumit Sawhney, VP Marketing & Sales, who tells us that “there is enough potential in the Indian market and we will be able to post better numbers in the festive season as compared to the past year”) are still playing on the sentiment philosophy that the festive season will resolve the current logjam in demand and will beat 2010 too. Will it?
We’ll cut the comedy. The answer is a flat no. Auto sales are inversely correlated to interest rate hikes. From October 2008 till March 2010, RBI had actually reduced interest rates. The economy demand delay cycle (approximately of 12 months, which basically shows how much do banks delay in passing on RBI interest rate movements) ensured that auto demand got a fantastic push some quarters later due to lower interest rates, new products and fantastic pricing offers from auto makers in the succeeding months – to an extent that the months of September 2010, October 2010 and even January 2011 bested historic highs of auto sales in India. But since April-May 2010 till July 2011, RBI has hiked repo rates by ten times to 8% now, with the last hike coming in the final week of July 2011. In other words, if the April-June 2011 mayhem in the auto segment looked bad (the auto sector saw a growth of just 1.6% m-o-m in June 2011), the coming months could showcase a similar trend. The maximum that the festival season could do is temper the bloodbath to an extent.
But all in all, with RBI still open to increasing repo rates further (we’ve still not reached the highs of 9% of August 2008), there’s no logic behind the automakers positive sentiments for the coming season. In short, Hicks was right, they are wrong.
We’ll cut the comedy. The answer is a flat no. Auto sales are inversely correlated to interest rate hikes. From October 2008 till March 2010, RBI had actually reduced interest rates. The economy demand delay cycle (approximately of 12 months, which basically shows how much do banks delay in passing on RBI interest rate movements) ensured that auto demand got a fantastic push some quarters later due to lower interest rates, new products and fantastic pricing offers from auto makers in the succeeding months – to an extent that the months of September 2010, October 2010 and even January 2011 bested historic highs of auto sales in India. But since April-May 2010 till July 2011, RBI has hiked repo rates by ten times to 8% now, with the last hike coming in the final week of July 2011. In other words, if the April-June 2011 mayhem in the auto segment looked bad (the auto sector saw a growth of just 1.6% m-o-m in June 2011), the coming months could showcase a similar trend. The maximum that the festival season could do is temper the bloodbath to an extent.
But all in all, with RBI still open to increasing repo rates further (we’ve still not reached the highs of 9% of August 2008), there’s no logic behind the automakers positive sentiments for the coming season. In short, Hicks was right, they are wrong.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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IIPM: Indian Institute of Planning and Management
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
IIPM Prof. Arindam Chaudhuri on Internet Hooliganism
Arindam Chaudhuri: We need Hazare's leadership
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
