Car loans can get more expensive in India. here’s why

RBI has raised the repo rate by 40 basis points, meaning the rate at which banks lend to vehicle customers will see a hike.

By : HT automatic office
04 May 2022, 07:34 PM

File photo used for representational purposes. (Reuters)

Thinking of buying a new car or have you almost sealed the decision to ride that shiny bike? Take a break from shifting, because while OEMs have hiked prices on models due to factors like rising input costs, affordability is likely to take a hit for those considering switching. way of payments as the Reserve Bank of India (RBI) increased its main interest. rate of 40 basis points, a decision that took most by surprise.

News of a repo rate hike is likely to impact various sectors, but the automotive sector is particularly concerned. Already grappling with far-reaching challenges, OEMs across all segments could see potential demand disruption at a time when supply and production have slowed. “The RBI’s decision to increase the repo rate by 40 basis points clearly caught everyone off guard,” said Vinkesh Gulati, chairman of the Federation of Automobile Dealers Associations of India (FADA). “This move will reduce excess liquidity in the system and make the auto Although the PV segment may be able to absorb this shock due to long waiting periods, the 2W segment which has not been performing due to an underperforming rural market, rising vehicle prices and high fuel costs, will not be able to afford one more of the high car loan costs.”

While Gulati predicts “brakes on auto retail” and muted sentiment, the stock market on Wednesday reflected similar sentiments with auto, real estate and banking stocks plummeting. Among automakers, Ashok Leyland plunged 4.44%, Bajaj Auto fell 3.54%, TVS Motor (3.31%), Maruti (3.17%), Hero MotoCorp (3.08%) , M&M (2.70%) and Tata Motors (2.11 percent), according to the PTI news agency.

What is the repo rate?

The repo rate refers to the rate at which RBI lends to commercial banks. A hike here means a hike in the interest rate charged on EMIs to people in general. The repo rate was raised to 4.40% from 4% and marks the first move north since August 2018.

What is the cash reserve ratio?

The cash reserve ratio or CRR is the amount of money that banks must park with the central bank. The higher the CRR, the less banks have to lend to the general public. On Wednesday, the CRR was also raised by 50 basis points to 4.5%.

What do the repo rate and CRR hikes mean for the automotive sector?

Demand in the Indian automotive sector has been rather lackluster. While passenger vehicles are still doing reasonably well, supply chain issues caused by the global shortage of semiconductor chips have hurt production and led to long wait times. In the case of two-wheelers, demand itself has been sluggish. The utility vehicle segments also failed to impress.

With indications that auto loans are becoming more expensive, demand for automobiles across all segments is expected to suffer.

Date of first publication: May 04, 2022, 7:34 PM IST