e There is a bigger dent to industry which collapsed 38.1% on-year, mainly led by construction (completely
crippled during the lockdown) and manufacturing (related to discretionary consumption and exports). Within
services, which contracted 20.6%, wholesale, retail trade and transport together saw a ~47% drop as activity
in these sectors came to a complete standstill. The big worry is that not only are these sectors huge employers,
but also house a large proportion of micro, small and medium enterprises (MSMEs), some of which may
succumb to the hit.

« However, in the midst of all this, the Covid-19 curve appears to be flattening in India with recovery rates
continuing to surpass new cases. High frequency data in September also shows economic conditions have
been improving. Exports turned positive in the month, the purchasing managers’ index for manufacturing
was at an eight-year high, and power consumption and GST collections grew on-year. However, this recovery
is fragile and largely led by pent-up demand. The ongoing festive season will remain a key monitorable since
a resurgence of cases can prove spoilsport.

Outlook

CRISIL expects India’s real GDP growth at -9% in fiscal 2021, as the economy learns to live with the pandemic.
While it is true that economic indicators have improved in the past few months, S&P Global points out in its
recent assessment that the recovery is uneven and fragile. As a result of the pandemic resurging, recovery is losing
steam in the United States (US), Europe and emerging markets. Asia-Pacific research at S&P shows that even
recovery in China, which saw an early exit from the pandemic and is now posting positive growth, is neither self-
sustaining nor balanced as yet.

As for the Indian economy as a whole, the Reserve Bank of India (RBI) too, has forecast GDP growth for the
current fiscal at -9.6%, confirming that the economy will witness its deepest contraction since Independence. Short
of cutting interest rates, the central bank has taken comprehensive steps to support growth and assured markets of
an accommodative monetary stance through the next fiscal, if needed. Clearly, Mint Road also sees the current
spike in inflation as transitory. Enhanced open market operations for government securities and extending the
window to state development loans should keep borrowing costs for governments under check.

Auto Finance

Rates on a downtrend

Overall yields in the auto finance segment are declining since 2-3 years led by softening of retail inflation and
reduction in G-Sec yields. Also, with the implementation of marginal cost of funds based lending rate (MCLR)
regime from April 1, 2016, auto finance rates have remained subdued, as banks are forced to pass on interest rate
benefits to end consumers. This has helped to bring the yields down by 100-130 bps since fiscal 2015.

After a continued drop in repo rates since fiscal 2020, auto finance rates are on a downward trend. In fiscal 2021,
amidst the pandemic, passenger vehicles (PV) and commercial vehicles (CV) finance rates have softened

significantly while two wheeler financing rates have dropped by a lesser extent given the relatively humble credit
profile of the customers.

Average auto finance rates offered by banks (%)
15.0
13.0 6 12.0
11.0 ‘ 10.6
oo sroctereccceneneecreneeeeeeeeteeeee nl es Tet eeee

7.0

Feb-18
Jun-18
Oct-18
Dec-18
Feb-19
Jun-19
Oct-19

—8=—PV =—®=—CV —®Two Wheelers

Source: Industry, CRISIL Research

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