RBI Monetary Policy: Homebuyers Wish For Rate Cut Than Pause; How Policy Repo Rate Impacts Home Loan EMIs

RBI is set to declare the outcomes of the August 2023 monetary policy on Thursday, and a pause in key rates is most likely on the cards. However, the real estate sector, especially home buyers desire a repo rate cut to make housing loans affordable. Any change in RBI's repo rate will typically have a direct impact on home loan EMIs as banks have opted for repo-rate linked lending rates benchmark. If there is a hike in repo rate, this usually leads to a rise in interest rates on home loans and hence EMIs get costlier. Such would be the opposite in the case of a repo rate cut.

Due to stubbornly high inflation rate, RBI hiked rates by 250 bps from May 2022 to February 2023. Because of this, banks have revised their repo-linked external benchmark-based lending rates (EBLRs) upwards by a similar magnitude. The 1-year median MCLR of SCBs increased by 142 bps from May 2022 to May 2023. Consequently, the weighted average lending rate (WALR) on fresh and outstanding rupee loans increased by 176 bps and 106 bps, respectively, during the same period.

However, since RBI has maintained the status quo in the repo rate to 6.5% for the second time in a row, lending rates have slightly dipped.

The latest data from RBI showed that the weighted average lending rate (WALR) on fresh rupee loans of SCBs decreased by 7 basis points (bps) from 9.27% in May 2023 to 9.20% in June 2023. However, WALR on outstanding rupee loans of SCBs has jumped 4 bps to 9.82% in June on a month-on-month basis.

Similarly, the 1-year median Marginal Cost of fund-based Lending Rate (MCLR) of SCBs decreased from 8.65% in June 2023 to 8.63% in July 2023.

What to expect from RBI's August 2023 policy?

Highlighting about realty sector and homebuyers' expectations from RBI's policy, Vickash Chowdhary, Founder, of Alpine Primo said, "The expectations of the real estate industry and home buyers from an RBI MPC meeting can vary depending on the prevailing economic conditions and the central bank's recent policy stance. However, there are some general expectations that stakeholders in the real estate sector may have from an MPC meeting. One of the primary expectations is related to the RBI's key policy rates, such as the repo rate."

Chowdhary added, "Home buyers and real estate developers may hope for a reduction in interest rates to make housing loans more affordable, thereby potentially boosting housing demand and investment. The real estate industry may expect the RBI to take measures to ensure adequate liquidity in the banking system. Sufficient liquidity can support banks in providing credit for home loans and real estate projects. Stakeholders in the real estate sector would closely watch the MPC's assessment of the overall economic situation. A positive economic outlook may indicate potential growth in the real estate market, while a pessimistic outlook might lead to cautiousness among buyers and developers."

Talking about RBI's stand after US Fed rate hike, Chowdhary said, "If the US Federal Reserve decides to hike interest rates, it could have implications for the global financial markets and economies, including India. A US rate hike may lead to capital outflows from emerging markets like India as investors seek higher returns in the US. This could put pressure on the Indian rupee and impact inflation and import costs. To respond to such potential developments, the RBI may consider various options, including adjusting its own policy rates (like the repo rate) and implementing other measures to manage liquidity, inflation, and exchange rates."

Meanwhile, Kaushik Mehta, Founder & CEO of Ruloans Distribution said, "The RBI's steadfast strategy of maintaining stable interest rates is likely to be the driving force for growth in retail loans, encompassing both personal and home loans. By ensuring consistent and predictable borrowing costs, this approach not only fosters a favourable environment for businesses and individuals to invest, expand, or fulfil personal aspirations but also makes financial goals such as homeownership and personal endeavours more attainable. This commitment reflects the central bank's dedication to providing stability and support in the economic journey of borrowers, ultimately contributing to a more robust and thriving financial landscape."

However, in case a rate hike is on the cards, Chowdhary said, "Interest rates directly influence the cost of borrowing for home buyers and real estate developers. When rates increase, it becomes more expensive for individuals and businesses to take out loans for purchasing properties or funding real estate projects. This can lead to a decrease in demand for housing and commercial properties as affordability reduces. As borrowing costs rise, the affordability of homes decreases for potential buyers."

Accordingly, Alpine Primo's founder said, this can lead to a decline in demand for real estate, especially among first-time homebuyers or those with tight budgets. Reduced demand can put downward pressure on property prices. Interest rate hikes can influence property prices in various ways. In the short term, as demand slows down due to higher borrowing costs, property sellers may face challenges in achieving their desired prices. This could lead to a cooling of property prices or even a decline in some markets.

Disclaimer

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