Photographer: Prashanth Vishwanathan/Bloomberg

What Drives Automobile Sales? It’s Not Bank Credit, Says Research By RBI

The auto industry has been in the midst of a slowdown for the last few months. Industry-wide sales, reported by the Society of Indian Automobile Manufacturers, grew under 3 percent in 2018-19. The immediate outlook, too, remains clouded. On Thursday, India’s largest carmaker, Maruti Suzuki India Ltd., forecast lower sales growth for the current financial year, indicating that the slowdown is not over.

Many have blamed this, at least partly, on the lower availability of finance.

However, a study published by the Reserve Bank of India, as part of its Mint Street Memos series, suggests that fuel prices impact auto sales far more than credit. In addition, policy changes, including those that impacted the cost of insurance, have had a bearing on auto demand.

Impact of Fuel Prices Vs Impact of Credit

The research paper used data to assess the factors that impacted auto sales during the period between April 2008 and January 2019.

The research found:

  • On an average, an increase of 100 basis points in fuel prices today, will decrease automobile sales growth, excluding two-wheelers, by 26 basis points on an immediate basis and by 72 basis points two months down the line.
  • On the other hand, an increase of 100 basis points in bank credit today, will only increase automobile sales growth by 0.05 basis points on an immediate basis and 0.13 basis points with a two month lag.
We find that fuel price movements matter for aggregate growth in automobile sales, while credit appears to have no significant impact, said the RBI.
 What Drives Automobile Sales? It’s Not Bank Credit, Says Research By RBI

The Other Factors

After establishing the long-term relation between fuel prices, credit and auto sales, the paper goes on to examine the period between March 2018 and October 2018, when auto sales have slowed.

That part of the study showed that policy shocks, such as higher insurance costs, have had a bearing on auto sales during this period. “Since the insurance policy announcement period overlapped with the period when crude prices were going up, it is difficult to separate the impact of the two events quantitatively,” the research paper said.

The study also goes on to measure the impact of ride-hailing services on automobile sales. It notes that taxi registrations have started to slip since 2016 and that has had some impact on the four-wheeler market.

The research found that the decline in demand from ride-hailing services alone accounted for a 54-basis-point decline in car sales during the last two years.

The partial decline in taxi registrations seen since 2016 can possibly be attributed to the maturity of these services and overall saturation of taxi supply. Since taxi registrations account for around 6 percent of the overall four-wheeler market, the decline in overall four-wheeler sales in the last two years can be partially attributed to this factor.
RBI Mint Street Memo
 What Drives Automobile Sales? It’s Not Bank Credit, Says Research By RBI

Shortcoming Of The Study

One shortcoming of the study is that when measuring the impact of credit on auto sales it has used bank credit data, which is available for a longer period of time. Quarterly data for non-bank financial companies is only available since 2015, the research paper said while explaining the exclusion.

NBFC vehicle loans grew at a high rate till late 2017. While growth in NBFC credit has tapered off since June 2018, the study believes this is because of base effect. Growth rates remain above the average growth in 2017 and nominal GDP growth rate. “Thus, it is unlikely that the recent slowdown in automobile sales growth is driven by the minor blip in the growth of NBFC vehicle credit,” the study said.