Indian auto dealers are approaching June with caution, as several factors cast a shadow over potential sales. High inventory levels, tighter financing options for consumers, and growing concerns about rare earth element shortages are creating a challenging environment for the industry.

The Federation of Automobile Dealers Associations of India (FADA) has indicated that only a third of its members anticipate growth in June, while a significant 55% expect sales to remain flat. This cautious outlook stems from a combination of demand-side and supply-side pressures.

One of the primary concerns is the existing high inventory of vehicles at dealerships. Passenger vehicle inventory stood at 52-53 days in May, exceeding FADA's recommended level. High inventory puts pressure on dealers, increasing carrying costs and potentially leading to price cuts to clear stock. Several factors have contributed to this inventory buildup. Passenger vehicle sales in May experienced a slowdown, with estimates suggesting a 1% year-on-year dip in wholesale and an 8% decline in retail demand. Despite expectations that easing interest rates and lower income taxes would spur sales, consumer demand has remained sluggish.

Adding to the woes, the sector is facing potential production disruptions due to restrictions on rare earth magnet exports from China. These magnets are critical components in both electric vehicles (EVs) and internal combustion engine (ICE) vehicles, used in essential systems such as power steering, electric windows, sensors, and motors. China, which controls a significant portion of the global rare earth supply chain, implemented new export restrictions in April, creating procedural hurdles and causing shipment delays for Indian manufacturers.

The impact of these restrictions is already being felt, with reports indicating that several shipments of rare earth magnets are stranded at Chinese ports. Industry executives have warned that current stockpiles of these materials may only last for a few weeks, and any further delays could lead to production halts as early as July. Bajaj Auto, a leading e-scooter manufacturer, has publicly stated that delays in resuming rare earth magnet shipments could significantly impact its production plans.

The situation is particularly concerning for the EV segment, which the auto industry has been counting on to drive growth. While EV sales in India have been growing at a faster pace than gasoline counterparts, they still only accounted for a small fraction of total car sales in the last fiscal year. The rare earth shortage could therefore hinder the momentum of EV adoption and dampen overall sales.

In response to the crisis, the Indian government is taking steps to address the supply chain vulnerabilities. Diplomatic channels have been opened with China to negotiate the resumption of rare earth magnet exports. Simultaneously, the Ministry of Heavy Industries is drafting a plan to incentivize domestic manufacturing of these magnets, aiming to reduce India's reliance on Chinese imports. The proposed scheme includes financial incentives for companies entering the rare earth magnet production space and promoting public-private partnerships to establish processing facilities within India. The government is also exploring alternative international suppliers to diversify its sourcing.

Despite the challenges, there are some glimmers of hope for the Indian auto industry. Above-normal monsoons are expected to boost tractor and two-wheeler sales in semi-urban and rural markets. Rural markets have demonstrated greater resilience than urban areas in recent months, driven by strong agricultural performance and improving liquidity conditions.

Overall, the Indian auto industry is navigating a complex landscape in June 2025. While near-term sales may be dampened by high inventory, tighter financing, and rare earth supply concerns, the long-term outlook remains positive, with potential for growth in the EV segment and in rural markets. Government initiatives to secure the rare earth supply chain and boost domestic manufacturing could also provide a much-needed fillip to the industry.