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Indian auto shares slump after cenbank policy

Date:2008-07-31

Shares in India's top vehicle makers slumped on Tuesday after the central bank tightened policy more aggressively than expected, raising concerns that interest rates on vehicle loans will rise further and slow demand.

The central bank on Tuesday raised its key lending rate for the third time in two months, taking it to 9 percent, its highest in seven years, to help check inflation from near 12 percent.

It also increased banks' reserve requirements. Vehicle makers have already seen demand for commercial vehicles and motorbikes slow because of higher interest rates, rising fuel prices and high inflation, which has crimped consumer spending in Asia's third-largest economy.

Meanwhile, rising costs of raw-materials such as steel and rubber are also weighing on profit margins.

Shares in Tata Motors, the top bus and truck maker, had fallen 5.3 percent to 403.40 rupees at 0725 GMT, while top car maker Maruti Suzuki India Ltd was down 6.8 percent at 569 rupees in a Mumbai market .BSESN that had lost more than 4 percent.

Top utility vehicle maker Mahindra & Mahindra Ltd was down 6.2 percent at 496.80 rupees.

"The expectation is that interest rates on vehicle may go up by about 50 basis points now," said Ashutosh Goel at Edelweiss Securities.

Interest rates on vehicle loans, which finance more than three-quarters of purchases of cars and commercial vehicles, have jumped by about 300 basis points over six months, Goel estimates.
"Along with the rate increase, the concern is also about credit availability. Banks have become more reluctant to lend for vehicle purchases, especially motorbikes and trucks," he said.

The auto share index was down 3.8 percent at 3,582.61. Concerns about inflation, interest rates and high raw-material costs had dragged the index to its lowest in more than 2-½ years earlier this month.

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