Combating rate hikes

Going by the volume growth seen last year, car and bike buyers have taken the series of interest rate hikes by the RBI since March 2010 in their stride.

While financiers have absorbed a small portion of the rise, they have predominantly been able to pass it on to customers without affecting demand.

But with RBI willing to sacrifice growth for inflation, it may only be a matter of time before fuel prices go up, increasing the cost of ownership.

Moving forward, “the urban consumer may get into wait-and-watch mode, scouting for discounts or offers”, feels Mr Ramesh Iyer, Managing Director, Mahindra Finance. With some vehicles/models remaining in short supply due to the robust demand till as recently as April 2011, it may take a while for this to show up in the volume growth moderating.

But this trend may catch on sooner than later. In a conference call following the fourth quarter results of Maruti, the management hinted at a visible stress in the market with declining footfalls and conversion ratios since January this year.

What this means for them is that at a time when growth is tempering down, they may also have to inch up their marketing/promotional expenses.

In the bikes segment, Hero Honda remains more vulnerable to a further rise in interest rates than Bajaj.

The latter has more products in the higher segments which may not be as price-sensitive as the entry segment buyers.

However, some good news is that the rural demand may be less impacted, given the increased income from good crop prices and robust yields.

Hence, volumes for the company could keep coming from its strong rural foothold.

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