GR Exclusive: What RBI Holding Repo Rate Unchanged Means For Your Home Loan EMI? Find Out!

The Reserve Bank of India (RBI) decided to maintain the repo rates at 6.5% for the sixth consecutive time during the recent three-day monetary policy committee meeting. The announcement came on Thursday from RBI Governor Shaktikanta Das, who emphasized the Monetary Policy Committee's (MPC) commitment to stability.

The MPC's decision to keep the repo rate unchanged has prolonged the anticipation of home loan borrowers hoping for a respite from high interest rates. The borrowers, who have been eagerly awaiting a reversal in the interest rate cycle, will have to wait a bit longer for a potential decrease in their Equated Monthly Installments (EMIs).

Governor Das, addressing the media, highlighted the MPC's vigilance on food inflation, underlining the committee's efforts to ensure that any benefits gained are not lost amid potential inflationary pressures.

While the RBI has opted to maintain the status quo this time, there are indications that a change might be on the horizon. The decision not to reduce rates may be temporary, with potential future adjustments to support economic growth.

Analysts suggest that benign inflation and robust economic growth could play pivotal roles in influencing the RBI to consider rate reductions in the coming days. Rising global inflation prompted the RBI to raise the repo rate by 2.5% between May 2022 and February 2023. However, the recent trend of subsiding inflation, now below 6%, the upper limit of the RBI's tolerance zone, offers room for potential rate cuts.

The announcement comes following the presentation of the Interim Budget 2024 by Finance Minister Nirmala Sitharaman, marking the first bi-monthly policy post the budget release. Despite the unchanged repo rate, it is anticipated that the RBI's decision will have no immediate impact on loan EMIs.

The wait for a fall in interest rates may extend, but there are optimistic signs for home loan borrowers. The current benign inflation and indications of stable economic growth may compel the RBI to consider rate reductions in the near future.

It's essential for borrowers to understand the factors influencing the RBI's decisions and how they can navigate through potential rate cuts to maximize benefits. While the central bank has held back a rate reduction this time, the likelihood of future adjustments opens a window for borrowers to prepare strategically.

While this decision brings temporary disappointment for those expecting immediate relief in EMIs, the long-term outlook remains positive. Home loan borrowers are encouraged to remain watchful of developments and consider strategic actions to make the most of potential rate cuts.

As the rate increase cycle was paused in April last year, many experts were anticipating a rate cut in the second half of the year. However, the recent decision suggests a potential shift in the timeline, with rate cuts possibly starting earlier, albeit at a slower pace.

Shashank Mewada, Chief Financial Officer at Homesfy Realty Ltd, expressed his views on the Reserve Bank of India's decision to maintain the repo rate at 6.5%, highlighting its significance for both the real estate sector and homebuyers.

"Holding the repo rate steady at 6.5% reflects the RBI's commitment to balancing inflation control with supporting economic growth, underscoring the confidence in fostering a stable and predictable investment environment. Stability in interest rates over the last year has been one of the drivers of the housing demand in India in CY23, and the decision to keep it unchanged will continue to drive demand in CY24 as well. Affordability remains strong, driven by relatively stable macros in India compared to global sluggishness," remarked Mewada.

He emphasized that the steady repo rate is a crucial factor in maintaining the robust demand for housing in India. The consistency in interest rates has provided stability, contributing significantly to the real estate sector's growth in the past year. Mewada anticipates that this decision will continue to stimulate demand in the real estate market throughout the current year.

"The RBI's decision is a welcome respite for homebuyers, especially first-time buyers who are often more sensitive to interest rate changes. This stability will help ensure that the dream of homeownership remains attainable for many. Indeed, it has been met with relief by homebuyers across the country," continued Mewada.

Highlighting the impact on borrowers, Mewada noted that the decision to maintain the repo rate offers a positive outlook for home loan EMIs. The stability in interest rates is expected to keep home loan EMIs stable, providing much-needed relief for borrowers facing the challenges of high interest rates.

"This move by RBI means that home loan EMIs will likely stay stable, providing much-needed aid for borrowers. This is a positive development for the real estate sector and is expected to boost buyer sentiment, which has been somewhat subdued recently. These measures, coupled with the RBI's accommodative monetary policy stance, will support continued growth and stability in the real estate sector," added Mewada.

The decision to halt the rate increase cycle in April of the previous year, following six consecutive rate hikes totalling 250 basis points since May 2022, has spurred speculation on potential rate cuts.

Consumer Price Index (CPI)-based inflation showed a marginal increase from 5.65% in November to 5.7% in December. However, core inflation, a more stable indicator, has slowed to a two-year low of 3.9%. According to a recent Morgan Stanley research report dated January 21, headline inflation is expected to remain range-bound around 5-5.2% year-on-year in the first quarter of 2024. The report anticipates an average of 5.4% year-on-year in the financial year 2024 and a further decline to 4.5% in the financial year 2025.

The prospect of a potential rate cut has gained momentum, with experts initially estimating it to happen in the second half of the year. However, recent developments suggest that the rate cut might commence earlier, albeit at a slower pace. The Morgan Stanley report outlines a shallow rate cut cycle of 50 basis points starting from June 2024. The cautious approach is driven by a watchful eye on potential risks stemming from stronger-than-expected growth, particularly robust credit growth that might defer the rate easing cycle.

For existing home loan borrowers, a potential rate cut could bring significant relief. A mere 0.5% drop in home loan interest rates could save a substantial amount, as illustrated by the example of a Rs 50-lakh loan for 20 years. If the interest rate decreases from 9% to 8.5%, it could result in savings of Rs 3.83 lakh. This holds particular significance for those who have witnessed a sharp increase in interest rates over the last three years.

To maximize benefits during this anticipated falling interest rate cycle, borrowers need to take proactive steps:

Check Your Loan Regime

Ensure that your loan regime is the external benchmark-linked lending rate (EBLR). If your loan falls under an old regime like BPLR, Base Rate, or MCLR, consider applying for a change to EBLR.

NBFC and Housing Finance Borrowers

If you obtained a home loan from a non-banking financial company (NBFC) or a housing finance company, switching to EBLR might not be an option. In such cases, sticking with a lender renowned for offering competitive rates could be advantageous.

Negotiate with Your Existing Lender

If your current home loan lender charges a higher rate than what other lenders are offering, consider negotiating with your lender to reprice your home loan to a lower rate.

Explore Refinancing Options

If your lender is unwilling to offer a lower rate, explore the possibility of refinancing your home loan with another institution that provides a more competitive rate.

For new home loan borrowers, the automatic benefit of falling rates is expected soon, especially if the loan is from a bank. However, those with loans from NBFCs should ensure that they are getting competitive rates to capitalize on potential long-term savings.

Disclaimer: The opinions and suggestions provided above represent the views of individual analysts and do not reflect those of GoodReturns or the author. We recommend investors consult with certified experts before making any investment decisions.