Rate hike seen hitting durables demand; autos steady

Rate hike seen hitting durables demand; autos steady

Mumbai: The higher-than-expected rise in interest rates by Reserve Bank of India (RBI) could hurt the consumer durables business, but demand in the booming auto sector may sustain, company officials said on Tuesday.

The central bank raised interest rates more forcefully than expected on Tuesday, signalling its urgency to stamp on inflation that is on track to hit double-digits for the sixth month running in July.

“If this trend of rate hikes continue, then maybe after six months, the interest rates will be so high that people will think before buying durables on an installment basis," said M M Miyajiwala, chief financial officer at Voltas Ltd which makes air conditioning and cooling products.

Indian economy is forecast to grow 8.5% in the current fiscal year after expanding 7.4% last year, with the auto industry in particular riding a surge in demand.

Consumer durables makers such has Whirlpool of India, Titan Industries and Blue Star have also posted robust sales so far this fiscal as income levels rise and consumer awareness grows. But firms fear that a rise in rates would keep buyers away from stores.

Besides, steelmakers, who typically operate in a very capital intensive sector, also fear that the spike in rates will eventually push up costs.

“In future, there will be some impact in terms of price rise. Starting third-quarter, the interest rates will go up, pushing up the costs," said Anil Sureka, executive director at Ispat Industries.

MVS Seshagiri, joint managing director at JSW Steel, India’s No. 3 producer, said he expects cost of borrowing to go up, which will in turn impact cost of production for steel producers.

Though officials were concerned about waning demand, analysts said RBI’s latest move will not hit offtake for the manufacturing sector as it left the cash reserve ratio (CRR), the percentage of cash banks must keep in reserve with the RBI by end-December, unchanged.

“This move will only help RBI to suck some liquidity but as far as manufacturing sector is concerned I do not think it will impact (demand) in a major way," said Kishor P Ostwal, chairman at brokerage CNI Research.

“If CRR had been raised then definitely liquidity would have been affected in a large way and rates could rise, hurting the manufacturing base," Ostwal said.

Auto in high gear

Automakers however are more optimistic than consumer durable firms and believe that the rate hike will only be a blip on the demand radar for vehicles.

“This will certainly have some amount of impact, but this will not make a major dent on consumer sentiment, because demand for automobiles is very robust at the moment," said Paban Kumar Kataky, director at Exide Industries, India’s top automotive battery maker.

“It is not going to impact the borrowing costs in a big way," said Ramesh Iyer, managing director at Mahindra & Mahindra Fin Services, adding that he did not expect banks to push up rates for auto loans to the extent that it would drive away potential consumers.

Car sales are expected to rise 12-13% in 2010-11, according to the Society of Indian Automobile Manufacturers.

“I do not think the OEMs (original equipment makers) will accept an increase in component prices because of a rise in rates. The only way we can compensate is increasing our volumes and scale of operations," said Santosh Singhi, chief financial officer at Amtek Auto Ltd, a auto-parts maker.

Several auto firms including Ashok Leyland and TVS Motor Co Ltd have increased vehicle prices as recently as June. TVS told Reuters last week the firm was not looking to raise prices again for 3 months. Besides, developers also said the real estate sector would not be impacted in the near term.

The Bombay Stock Exchange’s Auto index extended gains after the announcement and ended up 2.44%. The consumer durables index closed 0.96% higher, while the real estate index closed up about 1.5%. The broader 30-share BSE index closed 0.32% up.