Will the rate cut boost auto sales?

By Abdul Majeed
April 26, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Last week, the Reserve Bank of India (RBI) cut its lending rate by 50 basis points. This came as welcome relief for automakers as well as consumers since the domestic market was particularly sluggish last year, owing to high interest rates and an increase in raw material and fuel prices.

This rate cut, however, will not translate into increased vehicle sales, any time soon as its impact on car loan equated monthly instalments (EMIs) is negligible. Yet, the move will boost buyer sentiment, after the recent Budget proposals which hiked excise duty by 2 pct.

Even though the Indian macroeconomic environment continues to supply a confounding array of mixed signals (especially the uncertainty in fuel prices), the automotive market will steadily emerge from a temporary slowdown in growth from August, buoyed by demand in the festival season.

Also, the preference for diesel vehicles is likely to remain strong, as long as the steep difference between diesel and petrol prices exists in India. However, capacity constraints (in diesel) could limit sales in the near term.

To maximise opportunity in the current market conditions, companies need to cater to the rising rural consumer base. A few automakers, after being exposed to the perils of a joint venture or strategic alliance, no longer wish to continue that relationship and are instead willing to drive India strategy on their own by pumping in billions of dollars of investment.

Both original equipment manufacturers (OEMs) and suppliers should focus on win-win relationships with competitors to exploit strengths as opposed to perceived weaknesses such as the lack of an effective sales and distribution strategy.

They should allow both cooperation and competition to exist within the alliance by clearly determining objectives. Only through such alliances will companies be able to fill knowledge gaps in areas such as alternative fuels, electric vehicles and power train. Through such initiatives, they will be able to implement a new business model balancing precarious near-term volume estimates with long-term visions of sustainable and profitable growth. With long-term demand fundamentals still intact (rapid economic growth, growing middle-class, rising disposable incomes and low penetration rates) the Indian industry will regain its stride by the end of the year.

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