Auto loans set to be dearer, further price hikes expected

Your car loan burden is set to increase. Banks are preparing to increase interest rates on auto loans. This follows Friday’s repo and reverses repo rate hikes by the Reserve Bank of India.

This comes close on the heels of two consecutive increases in car prices and a 50-75 basis point hike in interest rates by leading banks like HDFC Bank and Kotak Mahindra Prime with effect from March 1 this year. The cumulative impact of these hikes on car prices would be anywhere between Rs 5,000 and Rs 50,000, depending on the models.

While rising input costs prompted the first hike in car prices in January this year, the second increase was an immediate reaction to the Union Budget. The decision to increase excise duty on cars by 2 per cent as part of an intiative for a partial rollback of the stimulus and an increase in fuel prices prompted the move.

Worse still, another increase in car prices is on the cards if the new emission norms come into force with effect from April 1, 2010.

The recent hikes in car prices comes at a time when the industry has witnessed robust sales since the last two quarters and more than a dozen car launches in less than a year.

According to the Society of Indian Automobile Manufacturers, passenger vehicle sales in the domestic market went up by 26.13 per cent to 17,50,139 units between April and February in the current fiscal as compared to 13,87,545 units in the corresponding period last year.

The entire automobile industry also registered a year-on-year growth of 25.3 per cent between April and February at 1,10,65,338 units vis-à-vis 88,30,164 units.

“There is a probability of another hike in interest rates but the quantum of increase will be determined in a week’s time based on the RBI’s recent move and the excessive liquidity in the system,” said Sumit Bali, chief executive officer, Kotak Mahindra Prime.

According to Bali, interest rates on auto loans had been softening for the whole of the current fiscal and the first hike took place in March.

Despite that the existing interest rates on cars are lower than that in April last year. While the current rates are hovering between 10.5 per cent and 11.5 per cent, it was around 12.5 per cent in April 2009.

Industry experts and analysts, however, feel the growth momentum will continue, at least in March, following new car launches, primarily in the compact car category.

“The low base of last year as well as a slew of new launches and an enhanced focus on rural sales will ensure that growth will continue to be robust in March at around 25 per cent vis-à-vis last year,” Abdul Majeed, analyst and partner, Price Waterhouse said.

“However, if input costs go up further and new emission norms gets implemented from next month, it will result in another 3-4 per cent increase in car prices. Consequnetly, car sales might be affected in the next three to four months.”

“Despite several odds, retail sales have been marginally higher in the first twenty days of the current month compared to the same time last year.It is estimated that the overall industry will grow by 30-35 per cent in March while GM sales will be in excess of 100 per cent over March last year when we sold 5,001units,” said Ankush Arora, vice president (sales and marketing), General Motors India.