India rate cut tempts shoppers to buy new cars, major appliances

Mumbai: The way car salesman Ashish Bhavsar tells it, in India, men come first on their own to eye up a potential purchase. Then they bring their wives. Then - if it's serious - the whole family.

On this weekday, almost two weeks after the Reserve Bank of India (RBI) cut interest rates, a young boy and his elderly grandmother inspect a sports utility vehicle at a busy Hyundai Motor dealership in downtown Mumbai, while his parents speak to a sales agent nearby. That's good news for branch manager Bhavsar.

He estimates that cheaper borrowing could mean sales growth of 12 to 15 percent this year, above his 10 percent target.

"Many customers were waiting for rate cuts. They didn't want to make a decision," he says with a grin, surrounded by gleaming new cars. "They will definitely come now."

India kicks off its two-month religious festive period on Monday, a time considered auspicious to buy big-ticket items such as cars, and when promotions abound. Company executives say they see the RBI's unexpectedly sharp 50 basis points cut last month as a lifeline.

Consumers have already been showing an eagerness to spend more on small luxuries, like movie tickets and fancy hair cuts, even as the overall economy struggles to take off after a period of cooler growth.

Yet with retail spending accounting for 50 to 60 percent of the economy, India needs households to splurge on more expensive, higher-margin items like washing machines, TVs and cars.

To date, a combination of slow consumer spending and a dearth of corporate investments has delivered a double punch to the economy, which grew a slower-than-expected 7 percent in the April-June quarter, well below the government's 8 to 8.5 percent target.

GOING SHOPPING

With inflation around record lows and central-bank rate cuts totalling 125 basis points so far this year, retail executives believe a consumer recovery is now in the offing.

Firms selling discretionary items such as cars and electronics are desperate for such a recovery. They have reported double digit annualised falls in earnings for the past four quarters.

Banks have not passed on all of the RBI's latest cut. In the last two weeks, auto loans are down only 25 basis points, and home loans by 30 basis points. But retailers expect traditional festival-season discounts to help pull shoppers in.

Added to that, Indian consumers often prefer instalment plans to finance bigger purchases. Known as equated monthly instalments (EMI), they are typically provided on a floating-rate basis, so consumers benefit from falling loan rates.

Sunita Pednekar, a 35-year old nurse, at one downtown electronics store, said she planned to buy a washing machine for now, and a TV next month during Diwali, the Hindu holiday that marks the peak of the festive period.

"We can afford the washing machine now since EMI will be cheaper after interest rates have come down, and there are discount offers before festive season," she said, speaking as she headed into the store with her husband and young son.

"I can spread out the expenditure, rather than pay a lump-sum amount upfront."

Optimism about consumer demand is being given a further boost as India gears up to raise the wages of 10 million government employees and pensions from next year.

Abheek Barua, chief economist at HDFC Bank in New Delhi, says last month's official rate cut and the expected pick-up in consumer demand would help boost economic growth. He has forecast 7.5 percent growth for the year ending in March.

"Earlier we were banking on investment demand to push up growth," he said. "Now we are expecting a better consumption phenomenon to drive growth."