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Auto loans may be more expensive after RBI repo rise

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In a surprise move, the Reserve Bank of India raised the repo or key rate by 40 basis points to 4.40% with immediate effect. This development is particularly worrying for the automotive sector, especially since retail demand is not yet fully exhausted. The immediate impact of rising repo rates is that EMIs are expected to become more expensive.

The RBI rate hike was announced after an emergency Central Bank meeting in light of recent geopolitical tensions, high crude oil prices, rising inflation and commodity shortages that have had impact on the economy as a whole.

As borrowers prepare to pay higher EMIs, those who opt for auto loans to purchase their vehicles are expected to wait a bit longer. This is because all personal loans, including car loans and home loans, are likely to cost more.

The potential impact on customer purchasing power cannot be good news, especially for the entry-level commuter bike segment in two-wheelers and sedans in the PV space. Especially after the 11% decline in FY22, the market was hoping for a recovery in two-wheeler sales in FY23. consumer purchase. Retail funding has been a concern before and rising repo rates could make matters worse.

The aggressive rate hike is also seen as a specific signal from the apex bank in terms of the government’s economic policy direction. The move is decidedly hawkish and the transmission is likely to be faster for existing borrowers. Lenders in this type of scenario often increase the loan term instead of increasing the EMI amount. Nor can it be good news for the borrower.

Responding to the development and its possible impact on the automotive sector, FADA Chairman Vinkesh Gulati explained, “This move will reduce excess liquidity in the system and make car loans expensive. While the PV segment may be able to absorb this shock due to long waiting periods, the two-wheeler segment, which has been an underperformer due to an underperforming rural market, rising vehicle prices and high fuel costs, won’t be able to take a hit anymore from high car loan costs.

He believes the move will further weaken sentiment among retailers.