The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) has announced its decisions today. The repo rate has been kept at 4% and the reverse repo rate at 3.35% for the seventh time in a row. Economic slowdown due to the pandemic forced the RBI to keep the rates the same. The country is already hit by the after-effects of the second wave of the Covid-19 pandemic. The market for the real estate sector has not seen a profitable time since the last few quarters. The commercial real estate segment has also been drowning. New sales of residential real estate are not decent. Distress selling of residential real estate is another challenge.
A lower repo rate helps the banks to borrow money from the RBI with lower interest rates. This eventually keeps the interest rates of banks lower. For example, if a bank has to pay less interest to the RBI to borrow money from them, they will also be able to let people borrow money from them with lower interest rates. This directly impacts the home loan and car loan segments positively for the common people or borrowers. So, they will have to pay less interest for a home loan with a lower repo rate.
In India, a home loan is a very lucrative segment. Besides paying in cash, a huge number of people buy their residential places with loans. But due to the pandemic, loss of jobs and low wages emerged as one of the most significant problems. So, people do not actually have plenty of money to invest in new real estate projects. The RBI's decision to keep the repo rate the same will ease the sector as there will not be a hike in banks' interest rates in any time soon. This will encourage more people to take home loans and eventually this will help the real estate sector.
A considerable increase in the cost of raw materials like steel and cement has hiked real estate prices since last year. But the pandemic pulled down real estate cost largely in the Q2 and Q3 in the previous fiscal. From Q4 of FY 20-21, the sector started to gain pace again. So, a lower repo rate by the RBI will be helpful for people.
Anuj Puri, Chairman, ANAROCK Property Consultants commented, "The real GDP forecast for the FY 2021-22 remains at 9.5% in the wake of the vaccination drive that is in full swing in India. All this is positive for the residential market, which has strong correlations to the overall state of the economy. The unchanged repo rate regime works well for home loan borrowers as the floating retail loan rates, which is directly linked to external benchmark repo rates, have been at the lowest level in the last two decades. The continuation of this low-interest rate regime supports the environment of affordability which has become the new hallmark of the housing market - during the pandemic, and even before."
Earlier this year Samantak Das, Chief Economist and Head of Research & REIS (India) commented to the press, "Recovery in residential real estate that was witnessed during January-March 2021 quarter was impacted by the lockdowns introduced to control the pandemic resurgence. Though the competitive mortgage rates are expected to provide long-term support for sustained growth of real estate, overall economic recovery leading to job and income growth will be contributing factors for housing demand."
However, the union government will have to come up with new policies and investment planning in big industries to offer new job opportunities. It will help people to spend more money. Otherwise, not just the real estate sector but all other sectors will remain doomed.
Anuj Puri added, "Had it not been for the pandemic, the RBI could have taken a different stance for the benchmark rates today. On the upside, the RBI did confirm that economic activity is reviving with the ebbing of Covid-19 in most states across the country."