India’s passenger vehicle (PV) segment has witnessed strong growth in the last few fiscal years, buoyed by increasing disposable incomes. Domestic PV sales hit a record for April 2025, with 348,847 units sold—up 3.9% year-on-year, according to the latest data from the Society of Indian Automobile Manufacturers (SIAM). In FY 2024-25, total sales hit a record 4.3mn units, marking a 2% year-on-year increase.

The momentum is expected to continue into FY 2025-26, aided by falling interest rates that are making vehicle financing more accessible. Business Standard recently reported that the Reserve Bank of India (RBI) may opt for three consecutive policy rate cuts, beginning with a 25-basis point reduction in June. The central bank has already lowered the policy rate twice in three months, bringing it down to 6%, as inflation continues to ease.

If the RBI proceeds with further cuts, the PV market could receive a significant boost. A report by Crisil Ratings says that the domestic and export volumes combined could surpass 5mn units in the current FY2025-26, despite a weakening in annual growth to 2–4%. This would mark the fourth straight year of record-breaking sales, although growth has tapered from the post-pandemic surge of 25% seen in FY 2023.

Utility vehicles (UVs) are expected to lead the charge this year, supported by a wave of new launches, improving rural demand, rising adoption of compressed natural gas (CNG) vehicles, and more favourable financing conditions. However, gains may be constrained by sluggish sales of entry-level cars and sedans, along with tepid electric vehicle (EV) adoption.

With volume growth moderating, equipment makers are looking to an improved product mix to help safeguard margins. Softer input prices, better plant utilisation, and selective price hikes are likely to partly offset rising regulatory compliance costs, helping operating margins remain steady at 12–12.5%.

Strong cash flows and healthy cash reserves will enable OEMs to comfortably fund high capital expenditure plans while maintaining sound balance sheets and stable credit profiles. Crisil Ratings’ analysis of six major OEMs—together representing around 90% of the domestic PV market—supports this outlook.

The Indian market made up for about 85% of total PV volumes last fiscal, with exports comprising the rest.

Crisil Ratings expects PV growth to moderate to 2–4% this fiscal, but UVs are forecast to grow around 10%, fuelled by strong momentum from new launches. UVs are likely to account for 68–70% of total volumes, and most upcoming models are expected in this category, underscoring the structural shift towards premiumisation. Demand for entry-level cars is also expected to improve with a rural recovery supported by the prospect of an above-normal monsoon and further interest rate reductions.

The fuel mix within the PV segment is also evolving rapidly. CNG-powered vehicles are gaining popularity due to low running costs and a rapidly expanding refuelling network, which now includes over 7,000 stations. Their share is projected to reach around 15% this fiscal.

Conversely, EV growth has slowed after doubling last year, albeit from a low base. Despite several new launches and falling battery prices, EV penetration is expected to remain modest at 3–3.5%, hindered by high purchase costs, limited charging infrastructure, and persistent range anxiety. As a result, EVs remain largely confined to urban markets and serve primarily as second vehicles.

Export growth is likely to moderate to 5–7% in FY 2025-26 amid global economic headwinds. The impending 25% US import tariff, effective from June 2025, is expected to have minimal impact as the US accounts for only ~1% of India’s PV exports. Companies may eye markets like Mexico, the Gulf, South Africa, and East Asia instead.

Despite stabilising input costs and slowing sales, OEMs have implemented 3–4% price increases to offset the rising costs of technology upgrades and regulatory compliance. These price adjustments, along with a favourable UV product mix, are expected to sustain margins and generate sufficient cash flow to ease capacity bottlenecks and support new product rollouts.

Crisil Ratings expects PV capex to remain elevated at around INR300bn ($3.5bn) this fiscal, as OEMs expand capacity, invest in EVs, and pursue localisation and digital upgrades. Despite the softer volume growth, this level of investment remains sustainable, backed by strong internal accruals and cash surpluses. 

The entry of global premium EV models, including Tesla, is expected to intensify competition in the premium segment, which currently accounts for less than 10% of total volume. These high-end offerings are likely to reshape consumer expectations across vehicle categories, pushing Indian OEMs to accelerate technology adoption. However, steep import tariffs are expected to continue limiting the number of such imports.

Going forward, the pace of rate cuts and EV adoption, along with the risk of supply disruptions—particularly in chips and battery cells amid ongoing global tensions—will be key factors to watch.