The rising interest rates will increase the cost of ownership of passenger and commercial vehicles at a time when the domestic automobile industry is already seeing a distinct slowdown. The only silver lining perhaps may be the two-wheelers segment, which may be the last to be affected, say experts.

“The rate hike will be negative for the auto industry as it would put pressure on banks to further increase base lending rates. Not just the small car buyers, who are more sensitive to rate hikes, but even those upgrading to bigger cars will get affected,” said Shashank Srivastava, chief general manager of marketing at Maruti Suzuki India.

Sales of Maruti Suzuki’s small car have dropped three per cent year on year in May 2011 to 61,048 units. The drop is the first in nearly three years. “Seventy per cent of passenger cars and over 90 per cent of commercial vehicles are bought through financing,” said an analyst with Pinc Research.

Experts said that the two-wheeler segment will not be affected due to rise in interest rates, as the cost of ownership is low and sales of two-wheelers are driven by usability and not discretionary factors as is the case with passenger cars. “The 4-wheeler segment will be impacted the most as it is more of a discretionary spend. Since this is marriage season, the two-wheelers may not be affected. One still cannot rule out the impact on two-wheelers with lag of one to two months,” Kevin D’Sa, CFO at Bajaj Auto told Financial Chronicle.

The domestic automobile industry has started feeling the jitters of an interest rate hike and petrol price hike in first two months of this financial year (2011-12). The industry will be impacted further if the diesel prices are de-regulated, feel industry observers. “It’s a double-whammy for the auto sector, which is already seeing an impact from high petrol prices. Customers may shift preference to lower-end cars in view of higher interest rates. The market is expecting more rate hikes to cool inflation by September, which may further hurt consumers,” said Adithya Bhat, managing director at Protiviti Consulting.

The analyst further said that the commercial vehicles segment is primarily driven by freight and during the monsoon fewer goods are transported. The growth in this segment is expected to be slow till the festive season, said the Pinc research analyst. C Ramakrishnan, CFO at Tata Motors said, “There will be some immediate impact on demand particularly on consumer side of the business rather than the industrial one, but we expect this to be managed over time. We are continuously evaluating our debt portfolio to optimise the costs of our borrowings. In this context using foreign currency borrowings is a likelihood.”

Tata Motors commercial vehicles volumes have declined from 44,601 units in March 2011 to 34,044 units in May 2011. However, on year-on-year basis, the sales have gone up by 22.61 per cent in May 2011. Tata Motors passenger vehicles sales have declined by 9.26 per cent year on year to 22,718 units in May 2011.

Ramesh G Iyer, MD, Mahindra and Mahindra Financial Services said, “The hike in interest rates was already anticipated and factored in by us in the last round of rate hikes we did. Though the personal mobility segment of the passenger car industry has slowed down, the commercial vehicles segment is not yet impacted as the hike in costs can be passed on in the form of higher freight rates and passenger fares.”

Passenger vehicle sales that rose 29 per cent in 2010-11, against the year ago slowed to 14 per cent In April 2010 and eight per cent in May. The drop to single digits occurred for the first time in two years.