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The auto sector has been grappling with two main challenges: Affordability, and liquidity. Both the Government of India and the Reserve Bank of India (RBI) have, in recent policy decisions, tried to address both these concerns through GST rationalisation and monetary easing. (1) GST rationalisation: The GST Council has approved a broad rationalisation of GST rates across vehicle categories, effective 22nd Sep’25. Notably, GST has been reduced from 28% (plus 1-3% cess) to 18% for: a) small petrol / diesel cars (≤1,200cc/1,500cc and ≤4,000mm), b) motorcycles ≤350cc, c) 3Ws, and d) motor vehicles for goods transport, directly addressing affordability in mass-market categories. For larger cars and UVs, the effective rate has been streamlined to 40% (vs. 45-50% earlier), while EVs continue to enjoy the concessional 5% rate, ensuring policy consistency. Tractors will now attract 5% GST (vs. 12% earlier), which should boost demand going ahead. However, GST on motorcycles >350cc has been raised to 40% (from 31%). Overall, we view this rationalisation as structurally positive for the auto sector, easing affordability pressures and supporting demand recovery. (2) Monetary easing: The recent CRR cut by the RBI has improved liquidity, reflected in retail vehicle loan growth of 8.7% / 10.8% YoY in Jun’25 / Jul’25. Given that both challenges - affordability and liquidity - are being addressed, we expect a sharp rebound in demand in the sector. We expect MSIL, M&M, HMCL, TVSL, and EIM to emerge as key beneficiaries of these developments.

• PV segment: In the passenger vehicle (PV) segment, the recent GST rationalisation is expected to be beneficial for both small cars and UVs. Small petrol/diesel cars (≤1,200cc/1,500cc and ≤4,000mm) will now attract GST of 18% vs. 29-31% earlier (28% GST plus 1-3% compensation cess). For larger cars and UVs, the effective rate has been streamlined to 40% vs. 45-50% earlier (28% GST plus 17-22% compensation cess). The GST rate on EVs is unchanged at 5%. We expect both MSIL and M&M to be key beneficiaries of these changes.
• For MSIL, small cars account for ~68% of domestic volumes, which will benefit from an 11-13% reduction in GST. Large cars and UVs contribute ~31% of domestic sales, which will see a 5-10% reduction. The recently launched e-Vitara is yet to contribute meaningfully to overall volume. - For M&M, ~30% of car volume falls under the 18% GST slab. EVs account for ~7% of domestic volume and continue to attract 5% GST. The remainder of the portfolio will be subject to the 40% GST rate.
• 2W segment: In the two-wheeler segment, the GST rate for vehicles up to 350cc has been reduced from 28% to 18%. On the other hand, GST on motorcycles above 350cc has increased to 40% from 31% earlier (28% GST plus 3% cess). For OEMs under our coverage, the >350cc category contributes ~9% / 4% of domestic 2W volumes for EIM / BJAUT, while the contribution is negligible or nil for HMCL and TVSL. We expect HMCL, TVSL, and EIM to be the key beneficiaries from this rationalisation.
• Tractor segment: The GST reduction has a favourable impact on both tractors and tractor parts. GST on tractors has been reduced from 12% to 5%, while tractor parts have seen a cut from 18% to 5%, eliminating the need for input tax credit. This is a significant positive for M&M, given tractors contribute ~33% of its domestic volume.
• 3W and CV Segment: GST on three-wheelers has been reduced to 18% (vs. 28% earlier). The CV segment previously attracted 28% GST, with an additional 15% cess on 10–13 seater public transport vehicles. That rate has now been streamlined to 18%.

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