Tata Motors PV, Maruti Suzuki, Ashok Leyland, auto stocks drop up to 3% as RBI signals rate cuts are ‘off the table’

Shares of automobile manufacturers Tata Motors, Maruti Suzuki, Mahindra & Mahindra and Hyundai Motor India, among others, declined up to 3% on Wednesday amid sharp selling pressure after the Reserve Bank of India raised the repo rate by 25 basis points to 5.50% and shifted its policy stance to ‘calibrated tightening’.

The Nifty Auto index fell over 1%, with major constituents under pressure. Maruti Suzuki, Tata Motors PV, M&M and Hyundai declined over 2%, while Ashok Leyland slipped more than 3%. Among two-wheelers, Hero MotoCorp, TVS Motor Company and Bajaj Auto fell over 2%.

What did the RBI governor say?

The RBI Governor said the re-escalation of the West Asia conflict has weighed on global economic sentiment, while the inflation outlook is less benign than it was last year. The Monetary Policy Committee (MPC) said recalibrating the policy rate is imperative, with four members voting in favour of a calibrated tightening stance. The MPC also indicated that rate cuts are off the table in the near term.

The MPC noted that strong GDP growth and high credit growth pose risks of demand-side pressure on CPI inflation, although there is limited evidence of such pressure so far. It also observed some signs of generalised inflation and said it is difficult to distinguish supply-side inflation from the second-order effects of price shocks. The committee added that the second-round impact of supply shocks needs to be taken into account.

What to expect from Q2 results?

Despite September's mixed showing, robust quarterly volumes should support Q2FY27 revenues. Margins, however, face greater pressure as cheaper raw-material inventories run out and elevated commodity costs flow through. Price increases and operating efficiencies offer partial offsets, although affordability concerns limit pricing flexibility.

Festive demand should hold up and dealer sentiment is positive, but expectations need to be calibrated given rural income risks and successive price hikes. October and November will also be measured against last year's GST-driven surge, creating an unusually high base. The key signal to watch is retail conversion and inventory clearance across the full festive period rather than any single month's year-on-year dispatch growth, Vincent K A, Senior Research Analyst, Geojit Investment, said.

The festival calendar is more spread out this year, with Navratri and Dussehra in October and Dhanteras and Diwali in November. This should support sustained demand through October and November rather than a single-month spike.

The key monitorable is retail conversion relative to dealer inventory. Passenger-vehicle dispatches are estimated at 4.60–4.65 lakh units in September (Source: Autocar), while retail registrations are closer to 4 lakh units, implying some festive stocking, said Subhash Gate, Senior Research Associate (Auto and Auto Ancillaries), Choice Institutional Equities.

If festive retail absorption remains strong, the sector can sustain this momentum. If not, there is a risk of higher channel inventory and increased discounting after the festive period, Gate said.

But risks remain

Commodity costs remain the principal earnings risk for Q2FY27 and FY27. Steel, aluminium, copper, rubber, precious metals, energy and freight are key cost heads for vehicle manufacturers and component suppliers. Their impact could be compounded by crude-price volatility, geopolitical disruption, higher shipping costs and rupee depreciation, particularly for companies with imported raw materials or components, Gate said.

The near-term earnings pattern is likely to be one of strong revenue growth but selective margin pressure. OEMs with premium product mix, high SUV exposure, robust pricing power, scale benefits and active cost-reduction programmes should be better able to protect margins. A favourable product mix can partially offset raw-material inflation because higher-value SUVs and premium variants generally provide better contribution margins.

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The risk is greater for entry-level two-wheelers, mass-market passenger vehicles, price-sensitive commercial vehicles and auto-component suppliers with limited contractual pass-through. These businesses face a difficult trade-off: passing on cost inflation through price hikes could affect affordability and demand, while delaying price action could compress gross margins, Gate added.

Disclaimer: This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Veer Sharma and his ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.