India’s newly hiked interest rates may slow down the auto industry’s recovery

The surprise hike in lending rate by India’s central bank yesterday (May 4) spells trouble for the auto industry recovering from a covid-triggered slump.

“When compared with April 2019, total vehicle retail was down by 6%…This move [by the RBI] will apply brakes and dampen the sentiments further,” according to a release from the Federation of Automobile Dealers Associations (FADA), an industry body.

Automobile makers recorded zero sales in April 2020 during India’s covid-19 lockdown. A global chip shortage due to supply constraints hit sales, too. Then came the Russia-Ukraine war and another lockdown in China.

“The Russia-Ukraine war and China lockdown will continue to create demand-supply mismatch thus delaying the availability of passenger vehicles. This, coupled with the RBI’s out of turn announcement of increasing repo rate by 40 basis points, has caught everyone off-guard,” FADA said.

“The move will curb excess liquidity in the system and will make auto loans expensive.”