RBI's Repo Rate Cut to 6.25%: What Does It Mean For India's Automobile Sector And What Does The Industry Have To Say?

In a significant move to boost economic growth, the Reserve Bank of India (RBI) cut the repo rate by 25 basis points, from 6.5 per cent to 6.25 per cent. RBI Governor Sanjay Malhotra announced this decision on February 7. It is expected to positively impact key sectors, including the automobile industry, which has been grappling with demand concerns amid high inflation and fluctuating consumer sentiment.

One of the most immediate and tangible benefits of the rate cut will be seen in the automobile sector, as borrowing costs for both consumers and businesses decline. With the reduction in the repo rate, banks are expected to lower their external benchmark lending rates (EBLR) and marginal cost of fund-based lending rates (MCLR). This will decrease equated monthly installments (EMIs) on vehicle loans, making car ownership more affordable for potential buyers.

The auto industry has faced significant demand challenges in recent years due to rising input costs, supply chain disruptions, and global economic uncertainties. The RBI's move to lower borrowing costs is expected to revive consumer sentiment and encourage purchases, particularly in the passenger vehicle and two-wheeler segments, where affordability plays a crucial role in sales volumes.

Apart from passenger vehicles, the rate cut is likely to benefit the commercial vehicle (CV) segment as well. Fleet operators and logistics companies, which rely heavily on financing for vehicle acquisitions, stand to gain from lower interest rates. With credit becoming more accessible and affordable, there could be an increase in fleet expansion, boosting demand for trucks, buses, and other commercial vehicles.

Non-banking financial companies (NBFCs) that specialise in vehicle loans are also expected to see a boost in business. Lower lending rates could lead to higher loan disbursements, particularly in the rural and semi-urban markets where NBFCs play a critical role in financing vehicle purchases. This, in turn, could help stimulate growth in the two-wheeler and entry-level car segments, which have seen subdued demand over the past year. 

Industry Reactions 

C.S. Vigneshwar, President of FADA, welcomed the decision, stating, “With auto loans set to become more affordable, we anticipate stronger demand in the two-wheeler and entry-level car segments, which have struggled with steep price hikes and affordability concerns.”

Arun Malhotra, an auto industry expert, called it “a welcome move” and added, “This will increase liquidity in the system, allowing banks and NBFCs to offer more attractive financing rates for vehicles.”

Nikunj Sanghi, Past President of FADA, emphasised the importance of banks and NBFCs passing on the benefit to consumers, saying, “If effectively implemented, this rate cut could serve as a significant trigger for retail demand.”

Animesh Das, MD & CEO, Acko, said "A repo rate cut can lower auto loan interest rates, making vehicle ownership more affordable. This drives demand for seamless, customer-centric insurance solutions. As mobility evolves, innovation and financial empowerment will shape the future of the auto and insurance industries."