India’s plan to pump cash into state-owned banks is brightening the prospects of two-wheeler makers as Prime Minister Manmohan Singh woos voters with cheaper loans in the world’s second-biggest market.
The government on Oct. 3 said it will bolster risk buffers of its lenders to encourage lower financing costs for consumer durables. That sent the S&P BSE India Auto Index to an eight-month high with Bajaj Auto Ltd. (BJAUT), TVS Motor Co. (TVSL) and Hero MotoCorp Ltd. (HMCL), the nation’s largest, rallying on the move to revive vehicle demand after sales growth slumped to a four-year low.
The decision may cut borrowing costs for consumers by 1 percentage point, said Vishal Narnolia, a Mumbai-based analyst at SMC Global Securities Ltd. Singh, facing national elections before May, is struggling to rekindle growth in an economy that expanded at the slowest pace in a decade as the central bank seeks to tame inflation by raising interest rates.
“They may be trying to appease a section of the voters before the polls,” Narnolia said. “This could boost sentiment as the government is signaling they are willing to take measures to stimulate consumption even when the central bank is raising policy rates.”
While the Reserve Bank of India is fighting consumer-price inflation at almost 10 percent, Singh’s ruling coalition headed by his Congress party is looking for ways to ease the cost of living in the country where the World Bank says more than 800 million people live on less than $2 a day.
The highest interest rates among Asia’s biggest emerging economies and the slowdown have eroded demand for consumer durables. RBI Governor Raghuram Rajan unexpectedly raised the benchmark repurchase rate on Sept. 20 by 25 basis points to 7.5 percent and signaled more to help rein in prices.
In a meeting on Oct. 3, Finance Minister Palaniappan Chidambaram discussed the “sluggish” credit growth in some sectors, prompting the decision to increase capital infusion from 140 billion rupees ($2.3 billion) allocated in February.
“We have decided to provide additional funds to banks so that they can lend to borrowers in selected sectors like two-wheelers and consumer durables at lower rates,” Rajiv Takru, banking secretary at India’s finance ministry, said in an interview on Oct. 4. “This will help in keeping the demand strong and reviving the economy.”
Two-wheeler sales in the year to March 31 grew 2.9 percent to 13.8 million units, the smallest gain since the year ended March 2009. They further cooled this fiscal year, with deliveries shrinking in two of the past six months, according to data provided by the Society of Indian Automobile Manufacturers.
“Loans will get cheaper in certain segments including consumer durables and automobiles,” said Arundhati Bhattacharya, chairman of State Bank of India, the nation’s biggest. “We are awaiting final approval from the government. This will boost demand during the festive season.”
Loans to buy consumer durables form less than 1 percent of retail credit in the country and grew at 34.6 percent in the 12 months to Aug. 23, data compiled by the central bank show. Total outstanding loans to buy vehicles grew by 23 percent to 1.2 trillion rupees in the period, the data showed.
TVS Motor has jumped 15 percent since Oct. 2 to 46.10 rupees, the highest since Jan. 15, while Bajaj Auto climbed 4.6 percent and reached a nine-month high at close on Oct. 7, according to data compiled by Bloomberg. Hero advanced 1.4 percent to 2,027.1 rupees in the same period.
“This measure to offer cheaper loans is expected to improve buying sentiments and boost sales of two wheelers,” Y.S. Guleria, sales chief at Honda Motorcycle & Scooter India Ltd., said in a text message on Oct. 4. “More than any substantial savings in the monthly installments, this will have positive impact on the market.”
Two-wheeler sales rose for the first time in the quarter ended September, after declining in the previous two quarters as a good monsoon boosts demand in India’s villages, according to the SIAM.
Deliveries in the second quarter of the year that began April 1 climbed 8 percent after the nation had its best monsoon rains since 2007, potentially boosting harvests of everything from rice to corn, sugar cane and cotton.
The government’s decision may not spur sales as state-owned banks have a relatively low market share of less than 2 percent in two-wheeler financing, said K. Srinivas, president of motorcycles at Bajaj Auto.
The run-up to the Hindu festival of Diwali in November typically sends consumption surging across India. More consumers are planning to purchase automobiles in the next 6 months as compared with the same period last year, ZyFin Research said in a report on Oct. 1. The improvement is due to the effect of the monsoon on agricultural output and is primarily in the rural part of the country, according to the report.
Higher incomes in rural India may also help boost the electoral prospects for the ruling Congress party to come back to power in nationwide elections due next year.
The main opposition Bharatiya Janata Party is set to make gains in state polls this year in one of the final tests for the parties before the national vote in May, according to a survey released Sept. 18 by the Times Now television channel and C-voter, a polling firm.
“The government measures will definitely help boost demand for two wheelers,” said Umesh Karne, an analyst with Brics Securities in Mumbai. “That will help increase sales in the short term although for the longer term, the economy will need to turn around for sales to sustain.”