Car loans may become more expensive after the increase in RBI repo

In a surprise move, the Reserve Bank of India raised its repo rate or key lending rate by 40 basis points to 4.40 per cent with immediate effect. The move is of particular concern to the automotive sector, especially if retail demand has not yet disappeared completely. The direct impact of raising 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 a shortage of commodities that have affected the economy as a whole.

As borrowers prepare to pay higher EMIs, it is expected that those who choose car loans to buy cars can wait a little longer. This is because all retail loans, including car loans and home loans, are likely to cost more.

The potential impact on customers ’purchasing power may not be good news, especially for the entry-level suburban bike segment in two-wheelers and hatchbacks in the PV space. Especially after falling 11 percent in fiscal year 22, the market was hoping for a revival of two-wheeler sales in fiscal year 23. But RBI’s current move to curb inflation is also holding back consumer purchasing power. Retail financing is already a concern, and raising repo rates could make matters worse.

An aggressive rate hike is also seen as a specific signal from the apex bank in terms of government economic policy. This move is definitely hawkish, and the transfer is likely to be faster for existing borrowers. Lenders in such a scenario often increase the term of the loan instead of increasing the amount of EMI. This also may not be good news for the borrower.

Responding to the development and its possible impact on the automotive sector, FADA President Vinkes Gulati explained: “This step will reduce the excess liquidity in the system and make car loans expensive. While the PV segment may absorb this shock due to long waiting periods, the two-wheeler segment, which has been inefficient due to low rural market efficiency, rising vehicle prices and high fuel costs, will not be able to withstand another blow high cost of car loans.

He believes the move will further weaken retail sentiment.