Monetary Policy: If RBI Keeps Repo Rate Unchanged, Will It Impact Your Home Loan EMIs?

Rate cut, status quo, or rate hike, either be the case, homebuyers will gauge RBI monetary policy outcomes since the key repo rate is directly linked to lending rates. While the repo rate is a tool for RBI to control inflationary pressures, however, this benchmark rate is also the interest rate at which the central bank lends money to banks during a shortage of liquidity.

To curb stubbornly high inflation, RBI raised the repo rate by a whopping 250 basis points between May 2022 to February 2023, which has also led to a significant rise in banks home loan interest rates. Since October 2019, banks have stopped using MCLR as the benchmark for deciding term loan rates, and instead have linked their lending rates to external benchmarks such as RBI's policy repo rate. Hence, any change in repo rate will have a direct impact on home loan EMIs.

Homebuyers have been given a breather from rising home loan rates since the April 2023 policy since RBI has kept the repo rate unchanged at 6.5%. Once again, all eyes will be on RBI who is said to announce yet another bi-monthly monetary policy for FY24 on October 6th. The majority of the economists are expecting a fourth status quo from RBI for the fiscal.

How RBI's October policy is expected to impact home loan rates:

Kaushik Mehta, Founder & CEO of RUloans Distribution said, "The forthcoming monetary policy meeting unfolds against a backdrop of cautious optimism. We anticipate the RBI will maintain rate stability, offering promising prospects for borrowers, particularly those contemplating home loans. This stability fosters confident financial planning, reducing uncertainties about interest rates and hasty refinancing decisions. The trajectory of the home loan market in the forthcoming year hinges on economic dynamics and consumer sentiment."

According to Mehta, if rate stability persists and the economy maintains its positive momentum, we may witness a surge in home loan applications, especially towards year-end, further fueled by the festive season. Diligent monitoring of economic indicators and central bank actions remains vital for both borrowers and lenders."

Similarly, Mehta added, "This stable rate environment is poised to invigorate not only the car loan market but also the broader finance and loan sectors. Consumers feel secure financing their vehicle purchases, and we can anticipate a rise in car loan applications, buoyed by favourable lending conditions and heightened demand during the festive season."

For first home buyers, Vimal Nadar, Senior Director & Head of Research at Colliers India said, "RBI is expected to continue its 'pause' stance and keep the benchmark lending rate at 6.5% for the fourth consecutive time. While consumer price inflation has moderated from the 15-month high of 7.44% in July 2023, the concerns of elevated food inflation remain high, and the Central Bank will be cautious. Nonetheless, RBI has already revised the inflation projection to 5.4% for FY 2023-24 to accommodate these concerns."

Similarly, Nadar also believes that steady repo rates will continue to bring stability in home loan lending rates by major banks & financial institutions. He said, this is critical during this festive period when most the fence sitters & first-time home buyers look for lucrative deals from developers & lending institutions to buy their dream home.

Meanwhile, Aman Sarin, Managing Director, Anant Raj Limited highlighted that in the recent past, the Reserve Bank of India has taken many effective steps to ensure that liquidity is available, inflation is under control and business is growing. He added, "We are very hopeful that RBI will maintain its current policies, focusing on bolstering economic growth, particularly in light of the approaching festive season while keeping a watchful eye on inflation and liquidity in the system."

In consideration of the real estate sector's funding requirement, Sarin said, "We strongly believe that the Reserve bank of India may consider extending benefits for the affordable and mid-housing segment in order to increase the affordability of homes specifically in metropolitan cities. This would help to achieve Housing for all in large cities where the maximum working population resides."

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How home loan rates are affected by RBI's repo rate decisions:

According to Axis Bank's blog, currently, a majority of bank loans are linked to the repo rate, so when the repo rate rises, the interest rates on loans also increase.

Axis Bank explained with an example: If you have a home loan of Rs 50 lakh at 8% per annum for 20 years and the interest rate increases to 9%, your monthly EMI payment will go up by around Rs 3,164 from Rs 41,822 to Rs 44,986. Hence, similarly, when the RBI reduces the repo rate, the interest rate on loans and EMI amount will decrease too. To put the whole math in simple terms: when the RBI repo rate rises, your loan EMIs will rise, and vice-versa.

Further, Axis Bank mentioned that to combat high inflation, the RBI has been increasing the repo rate since May of last year. During this period, the central bank has raised the repo rate from 4% to the current 6.5%. This has led to rising interest rates on different types of loans. However, since April 2023, the RBI has been maintaining the status quo on the policy rate at 6.5% for the third consecutive policy. No change in the repo rate means there will be no change in your loan EMI and you will continue to pay the same EMI and interest as earlier.

Lastly, Shishir Baijal, Chairman and Managing Director, Knight Frank India said, "We expect the Reserve Bank of India's Monetary Policy Committee (RBI MPC) to keep the REPO rate unchanged to remain supportive of growth. However, the central bank will likely maintain a precautionary stance because of the inflationary pressure arising from external factors such as rising crude prices and Indian currency, which is at an all-time low. A pause will be supportive of the real estate sector in maintaining its current momentum. With the last few revisions, the REPO rate has gone up by 250 BPS, resulting in 160bps hike in the base lending rate, with the last three revisions being completely passed on to the home buyers. This has started to impact housing demand, especially in the affordable segment. The mid segment too has seen growth moderating in the last few quarters. A further increase in the REPO rate could potentially dampen buyers' sentiment and impact housing affordability."

Disclaimer:

The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.