RBI Repo Rate: Is Status Quo What Homebuyers Need For Their Home Loan EMIs?

Any change in RBI's repo rate has a direct impact on home loan interest rates. Hikes or no hikes or a cut in repo rate will lead to a similar outcome on home loan EMIs, especially since October 2019 when banks linked their lending rates to external benchmarks such as RBI's policy rates. Home loan rates are already at peak level since RBI went on a rate hike cycle last year, but a status quo has so far been favourable for steady housing demand in FY24.

RBI has taken a wait-and-watch approach even when inflation rates are cooling down well within its target limit in the past few months. RBI continues to believe there are signs of hiccups which could push inflation up by end of FY24, and also the economy has not yet fully observed the brunt of an aggressive rates hike from May 2022 to February 2022.

Hence, RBI has maintained status quo since April 2023 policy, keeping repo rate at 6.5%, which is already the highest level since August 2018. After Russia invaded Ukraine in early 2022, RBI including other central banks went for aggressive hiking in interest rates to tame extreme inflation pressure. From May 2022 to February 2023, RBI has hiked the repo rate by 250 bps.

In the previous policy, RBI projected CPI at 5.6% in Q3FY24 and 5.2% in Q4FY24, while for the entire fiscal, it estimated a 5.4% CPI rate. In the case of GDP, RBI has projected a growth rate of 6% by Q3 and 5.7% by Q4, while the overall financial year projection is set at 6.5%.

This inflation target is higher from RBI's lower tolerance limit of 4%. As per the latest data, India's consumer price index (CPI) inflation dropped to its lowest in four months 4.87% in October 2023 owing to a decline in various product categories. The country's real GDP growth comes to around 7.6% in the second quarter of FY24.

With effect from 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.

Here's what real estate experts say about RBI's policy outcomes on December 8th and its impact on the housing sector:

Madhusudan Sharma, Executive Director, Bharat Housing Network:

The Reserve Bank of India (RBI) is likely to keep interest rates unchanged in its upcoming monetary policy review as inflation is in control. The central bank would want to support the GDP growth which is picking up momentum. This favorable stance could bode well for the housing sector as well, where we anticipate continued strong demand for home loans across segments. Additionally, the sector will also get a boost from expected supportive policy measures, particularly in rural and semi-urban areas.

Ramani Sastri, Chairman and MD, Sterling Developers:

The economy is looking robust with high investments across businesses in recent times. A recovery in property prices and rise in yields has made investment in residential properties attractive yet again and has been responsible for continued demand in the sector. The long-term benefits of owning a home have led to sustainable growth in the segment and we see this up-cycle continuing in 2024. An increase in earning potential, end user-driven demand, a need for a better standard of living and the growing base of aspirational consumers and their lifestyle changes has led to substantial demand and growth in the sector. With economic growth, the premium housing segment too will continue to witness higher demand in the future.

There can be further uptick in demand with reduction in rates, making it even more enticing for prospective homebuyers. Hence, a further reduction in interest rates would be preferred to bolster overall market confidence. We are also expecting significant growth in the near future, building on the success of this year and the continued strong demand in the real estate sector driven primarily by burgeoning aspirations. India's real estate market is one of the most dynamic and fastest-growing in the world. Real estate investments hence remain one of the most desired investments due to their strong base and reliability factor. We will continue to see a multi-fold growth in real estate investments since the real estate market is less volatile than other investment markets and delivers higher returns.

Overall, consumers are keen to buy homes as stability and security is on top of their mind now and the recent past has been testament to the fact that home buyer confidence is at an all-time high. As long as the macro fundamentals are stable, demand for real estate will continue to grow. The Indian real estate market is booming and being a part of its growth can extend favourable returns in the future.

Shishir Baijal, Chairman and Managing Director, Knight Frank India:

The 7.6% GDP growth has surpassed the RBI's expectations in Q2 FY24, complemented by consumer inflation comfortably within the RBI's zone of comfort. With these favourable economic indicators, the likelihood of a rate hike in the upcoming MPC is minimal. Despite potential challenges such as a possible uptick in food inflation and a volatile external environment, the RBI is poised to maintain its hawkish stance, keeping the repo rate steady at 6.5% for the fifth consecutive time this year.The real estate sector's demand is intricately linked to economic conditions and prevailing mortgage rates.

A positive economic outlook and stable interest rates create a conducive environment for sustaining home purchases. Notably, in the affordable segment, where demand momentum has trailed the overall residential market, interest rate movements play a pivotal role. Ensuring stable interest rates becomes imperative in this vulnerable segment, serving as a crucial catalyst to address the housing gap and propel the real estate market forward.

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.