PremiumThe rate hike by the RBI is hardly going to have any impact on the tractor demand, but it can falter due to the rising inflation, says Bharat Madan, CFO of Escorts Kubota Ltd
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The effect of the RBI interest rate hike will trickle down to several sectors of the economy. However, the CFO of Escorts Kubota Ltd, Bharat Madan, says that the rate hike by the RBI is hardly going to have any impact on the tractor demand, but it can falter due to the rising inflation.
"There is a marginal impact on demand...We don't see any significant impact on the demand side because of interest rate hikes," Madan told PTI while responding to a query on how the interest rate hike by the RBI could impact tractor sales. Escorts Kubota is a Japanese multinational firm that is known for manufacturing farm equipment like tractors.
The rate-setting panel of the Reserve Bank of India (RBI) on Friday raised the repo rate- the rate at which RBI lends to other commercial banks- by 50 basis points. The hike marked the third increase in the repo rate since May.
The repo rate hike can further increase inflation and may impact the sale of other commodities. Highlighting its impact on tractor sales Bharat Madan explains, "If you look at the industry in retail finance in tractors, the interest rate charges as it is are very high. Those rates do not move with the happenings on the RBI side. They're not floating rate,". At present, interest rates on tractor loans could range from 9 percent to over 20 percent per annum, depending on tenure and banks.
On what could impact tractor demand, he said, "I think it'll be more because of the inflation where the impact is coming, but the RBI increasing interest rates has a marginal impact only."
Apart from inflation, other factors come into play to change the demand for tractors. Due to the off-season and high base of last year, the tractor sale witnessed a flattish curve in the second and third quarters of this financial year. However, experts are hoping for a pick-up in the demand in the fourth quarter of the year.
According to July month's vehicle retail data released by the Federation of Automobile Dealers Association (FADA), there was a significant reduction in tractor sales which were showing good growth until a month ago.
The report cited erratic monsoon across the states as the major reason behind the fall in tractor demand. Due to unfavourable weather conditions, there was a 13% decline in the paddy cultivation area by the end of July, which led to a dip in the sales of tractors. However, the report expressed the possibility of better sales due to the coming festive season.
Apart from weather and agricultural condition, there have been some irregularities in the supply of other items used for production. There has been a shortage of supply of rubbers that has increased the tyre prices. But the prices of other factors like steel have gone down.
As for the outlook of the industry, Madan said, "We are still expecting low to mid-single-digit growth for the industry this year. We have seen that in the first quarter, the industry has grown 16 percent because of the low base effect of COVID. Last year was the second wave of COVID and the industry got impacted."
He also added that the coming month will not bring much in terms of sales."Normally, monsoon is not a season month for the industry but from September onward, we see the pick-up should happen. If the monsoon distribution is really good we should see some positives coming in the second half of this year," Madan said.
The market is expected to pick up growth in the last quarter of this financial year. Moreover, the sales may begin to improve from the third quarter only.
He also added that the festive season is starting early this year. This may lead to stocking up of materials causing a rise in sales from September onwards. That's why the firms are expecting September and October to be the big month. A sufficient rainfall, especially in the northern region, ensures good growth in the market in the fourth quarter of the year.
As per industry estimates, domestic tractor sales grew 13 percent to over 9 lakh units in 2021 compared to more than 8 lakh units in 2020.
Moreover, tractor sales showed a growth of 40% in June 2022, in comparison to the same month in 2021, according to FADA's retail report of June this year. The sales are expected to boost in the next quarter.
With inputs from PTI