RBI Policy: Repo Rate Unchanged At 6.5% For 4th Time, Will It Impact Home Loan EMIs?

Homebuyers are in for a treat as RBI decided to hit a pause in key policy repo rate at 6.5% on Friday. RBI's move is expected to drive demand for buying homes, especially in the festive season, with home loans to continue becoming an encouraging medium of financing as the interest rates will remain reasonable. RBI kept the repo rate at 6.5% since the onset of the current financial year, and this has been a much-needed relief for EMI-dependent homebuyers in times of stubbornly high inflation. Hence, the October 2023 policy comes as good news for real estate sector and banks' home loans.

Typically, rate cut, status quo, or rate hike, either 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 tame 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 April 2023 policy, RBI kept repo rate unchanged at 6.5% for fourth time in row.

And 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.

RBI Policy Impact on Home Loan EMIs:

Post RBI's latest policy, Shishir Baijal, Chairman & Managing Director, Knight Frank India explained that measures to reduce excess liquidity and improve transmission of earlier policy rate hike measures align with price stability goals of the central bank. He added, "The decision will continue to maintain the existing momentum of residential real estate demand in India. Since the interest rate upcycle, the repo rate has been hiked by 250bps, resulting in a 160bps rise in home loan rates."

However, Baijal also said that although the overall housing demand has remained upbeat, the lower housing segment or the affordable housing demand has witnessed a deceleration due to a substantial rise in borrowing costs and other challenges. Hence, he added, "The stance today should be considered as a big relief for the housing sector of the country which has shown tremendous strength in the face of headwinds over the last year"

Furthermore, Vimal Nadar, Senior Director and head of Research at Colliers India said, on anticipated lines, RBI has continued to maintain the status quo on benchmark lending rates for the fourth consecutive time. A steady repo rate of 6.5% since February, has been providing relief for EMI-dependent homebuyers, especially in these times of elevated inflation levels.

While Anoop Kumar Bhargava CEO and Director of Empire Centrum explains that a stable interest rate environment not only fosters confidence among potential buyers but also makes housing loans more accessible and affordable. It aligns with the spirit of celebration and encourages economic activity in the real estate sector, benefitting both buyers and the industry as a whole. This decision reflects the RBI's responsiveness to market dynamics and its commitment to supporting consumers during important milestones like home ownership.

Also, Rishabh Siroya, Founder of Siroya Corp believes that RBI's decision to keep repo rate unchanged move signifies stability and continuity in interest rates, providing much-needed relief and confidence to those aspiring to own a home. He added, "A steady repo rate translates into lower borrowing costs, making home loans more affordable. It not only encourages prospective buyers but also supports the housing sector's growth, ultimately contributing to the overall economic development. This decision showcases the RBI's prudent approach to balancing economic factors and fostering a conducive environment for individuals to achieve their homeownership dreams."

How Home Loan EMIs Are Calculated?

The formula to calculate home loan EMIs is -- P x R x (1+R)^N / [(1+R)^N-1] where- P stands for principal loan amount, N stands for Loan tenure in months, and R stands for Monthly interest rate.

It needs to be noted that The rate of interest (R) on your loan is calculated per month. For instance, if the rate of interest is 7.2% per annum, then R = 7.2/12/100 = 0.006.

So let's suppose, if you apply for Rs 10 lakh home loan amount at an annual interest rate of 7.2% for a tenure of 120 months (10 years), then his EMI will be calculated as under:

EMI= ₹10,00,000 * 0.006 * (1 + 0.006)120 / ((1 + 0.006)120 - 1) = ₹11,714.

Home Loans Outlook In Upcoming Festive Season:

The repo rate at 6.5% ahead of the festive season is a much-needed boost for home loans.

Anshuman Magazine, Chairman & CEO - India, South-East Asia, Middle East & Africa, CBRE anticipates a substantial number of homebuyers to finalise their decisions during the festive season, taking advantage of the repo-rate pause and any developer incentives.

Amid the festive season, Mohit Jain, Managing Director, of Krisumi Corporation the demand for housing particularly mid and luxury housing - is expected to remain robust over the next few months. The ever-increasing inclination towards buying cozy and comfortable living spaces will further get stronger in the near future.

As per Nadar, with developers likely to bring in festive offerings in the next few months, a stable financing environment will drive housing sales across categories. Overall festive tailwinds, the accommodative stance of RBI and ongoing freebies offered by various financial institutions & developers will keep the momentum in the residential segment strong for an upbeat 2023. Fence sitters and first-time homebuyers are likely to remain highly active across residential hotspots of major Indian cities.

Real Estate Sector Outlook After RBI Policy:

On the overall sector, Pratik Kataria, Director, of Sainath Developers and Committee member of the National Real Estate Development Council, Maharashtra (NAREDCO) also said, RBI's decision to maintain the repo rate at 6.50% is poised to offer a favourable outcome for the real estate sector, instilling a sense of stability and optimism. A constant borrowing cost facilitates home purchases and amplifies construction endeavours. This also reveals the RBI's commitment to nurturing gradual economic expansion while upholding equilibrium, fostering a constructive atmosphere that bolsters confidence among real estate participants. Moreover, developers stand to gain from this, as it secures foreseeable borrowing expenses, simplifying project strategizing and implementation.

Moreover, Shrinivas Rao, FRICS, CEO, of Vestian anticipates both real estate demand and supply to sustain its ongoing momentum on the back of stable market conditions. However, the uneven distribution of monsoon and its adverse effect on Kharif Crop planting may pose a challenge to curbing inflation. This may lead to a prolonged tighter monetary policy, which in turn will impact real estate activities.

Lastly, Amit Sarin, Managing Director, Anant Raj said, "Holding of interest rate at the same level in monetary policy is a welcome move and this move will help in a sustained recovery in economic growth which country is witnessing. Needless to say, the housing and the real estate sector stand to benefit from the decision. The demand for residential dwellings is expected to remain robust in the coming quarters. The borrowing cost for the corporate too would remain at a reasonable level, which will be beneficial for the economy as corporate will have the leeway to continue to undertake capital expenditure and investment."