High input costs and another round of possible interest rate hike could inflict a double blow to automobiles and consumer durables manufactures, who are already struggling to push sales and sustain profit growth from past years.
Both these sectors are heavily dependent on availability of finance, but a possible rise in interest rates that now looks imminent could force prospective consumers to defer purchases. Another round of increase in interest rates has become imminent after the Reserve Bank of India ordered commercial banks to keep more cash in reserves, saying there was too much money in the system that could fuel inflation further.
The RBI's move to hike the Cash Reseve Ratio from 7.5 per cent to 8 per cent will result in sucking out Rs 18,500 crore from the banking system. That, in turn, could push up cost of funds for banks and force them to increase interest rates.
After easing through first half of the decade, interest rates have sharply risen in the past two years alongside a spike in inflation.
Just as the softening interest rates had fueled a consumerist boom in the past, the trend now appears to be getting reversed.
Analysts and industry experts fear any further hike in interest rates could force consumers to defer purchases till the cost of borrowing starts falling.
Automobile and real estate will feel much of heat, said Roopa Purushothaman, head of Future Capital Research. So will be consumer durables. Some estimates suggest 20 per cent sales of consumer durables such as refrigerators, washing machines and television sets are driven through financing schemes.
"Any increase in interest costs would lead to hike in financing costs, thereby having an impact on sales of consumer durables," said R Zutshi, deputy managing director, Samsung India.
V Ramachandran, director sales & marketing, LG Electronics India, agreed.
"Consumer durable sales definitely get affected by the availability of loans and interest rates," Ramachandran said.
Manufactured goods, particularly consumer durables and automobiles, are typically more sensitive to interest rate movements.
In all of 2007-08 except the last month of March, sales of consumer durables dipped by 1 per cent from a year earlier, according government data.
Besides interest rates, high input costs, especially steel and metal prices and foreign exchange rate fluctuations have shrunk margins of automobiles and consumer goods manufacturers.
Industry sources indicated car companies are contemplating a further rise in prices.
While no one was forthcoming with the exact amount of the rise, a source at Maruti Suzuki India Ltd said the company was planning to hike prices very soon.
The same is the case with Honda Motors (HMIL). Along with its peers Toyota Kirloskar Motors and Hyundai Motors India, the Japanese carmaker imports a part of its vehicles assembled in India from countries such as Taiwan and Korea.