Fuel price movement affects automobile sales negatively whereas credit appears to have no significant impact, says a study by the Reserve Bank of India. A 100 basis points growth in fuel prices today will decrease automobile sales growth (excluding two-wheelers) by 72 bps two months down the line, the central bank study said.
“Based on our analysis, we find that the recent slowdown can be explained by relatively high fuel prices. Using firm-level stock prices data, we further show that the valuation of auto firms reacts inversely to fuel price movements,” the RBI study said. “This evidence corroborates the importance of fuel price movements for the automobile sector.”
In addition, the evidence from micro data on automobile registrations suggests that policy changes like vehicle insurance can also induce short-term fluctuations in the automobile sector, the study said. The maturity in the ride-hailing service segment may have also contributed to the slowdown in vehicle registrations over the last few years, according to the RBI study on “What Drives Automobile Sales? It’s not Credit”.
The study said, “on average, automobile credit has no significant impact on automobile sales. This is consistent across all the sub-components of automobiles. Fuel prices, however, show an interesting picture. We find that both contemporaneous and lagged increases in fuel prices have no statistically significant effect on total automobile sales.”
“On average, we find that a 100 basis points growth in fuel prices today will decrease automobile sales growth (excluding two-wheelers) by 72 bps two months down the line. Thus, by using this parsimonious specification, we find evidence that fuel prices do affect automobile sales (excluding two-wheelers); however the effects are not seen contemporaneously,” it said.
“Between fuel prices and credit, we find that only domestic fuel prices have a lagged (two months) negative impact on auto sales growth. The biggest impact of crude prices is seen on the sales of commercial vehicles and passenger vehicles, suggesting fuel price is more important for these segments compared to two-wheelers,” it said.
“Our analysis suggests that on average, the valuation of automobile companies takes a hit due to an increase in crude price. In fact, the negative impact of an increase in crude price on the adjusted stock returns of firms in the commercial automobile segment is the highest, which is in line with our results on automobile sales, the RBI study said.
“In addition to the government-induced policy changes, we also provide evidence that automobile sales in India were also affected by a surge in ride-hailing services across major cities in India. This development led to a sharp initial rise in new taxi registrations,” the RBI study said. At the peak, taxis accounted for 6 per cent of total car registrations across these cities. However, post 2015, the roll-out of ride-hailing services as well as the growth of taxis have declined significantly, due to maturity of these services. “This alone accounts for a 54 bps decline in car sales during the last two years,” it said.