The Reserve Bank of India (RBI) on February 8, 2023, increased the repo rate by 25 basis points to bring its benchmark lending rate at 6.50%. The largely anticipated hike will increase the cost of borrowing for homebuyers ─ 40 of 52 economists expected the RBI to raise its key repo rate by 25 basis points to 6.50%, according to a January 13-27 Reuters poll.
This is the 6th consecutive hike in the repo rate, at which India’s apex banks lends funds to scheduled banks in India. Since May 2022, the RBI has increased the repo rate by 250 basis points to contain inflation. The RBI is expected to hit a pause button on the repo rate after this.
A hundred basis point is equal to one percentage point.
Impact on home loans
With the latest hike, monthly home loan EMIs will go up by a couple of thousands for a common borrower. For instance, SBI customers currently paying a monthly EMIs of Rs 21,824 for a home loan of Rs 25 lakh for a 20-year tenure, will have to pay Rs 22,253 per month after the hike. If the tenure of the same loan is 30 years, the EMI would increase to Rs 19,846 from 19,400 per month.
“Home loan interest rates are already in the higher bracket of 8-9% in recent times. Further, housing prices are expected to largely remain firm in the upcoming quarters. We hope not to foresee a further rise in the repo rate and a resultant increase in loan rates. This will help sustain the demand and confidence of homebuyers in the market,” says Ramesh Nair, CEO, India and Market Development, Asia, Colliers.
Impact on real estate
The real estate sector has varying views on the rate hike. While some view the hike as something that can impact the buyer sentiment, others don’t.
Echoing the same sentiment, Amit Goyal, CEO, India Sotheby’s International Realty, says that while an increase in repo rate will certainly increase the home loan interest rates, he expects the housing demand to remain intact.
According to NAREDCO national vice-chairman Niranjan Hiranandani, the impact of home loan interest rate hike will be highly deterrent in the affordable housing segment “as it will impact the price sensitive homebuyers and fatigue the supply of the developers”. “The luxury and mid housing segment players will remain cautious with a bit longer sales cycle,” he says.
According to The Guardians Real Estate Advisory chairman Kaushal Agarwal, a rate cut at this stage could have triggered the sentiments of the homebuyers sustaining the growth momentum, coming in the backdrop of the recently concluded Budget, tailor-made for the salaried and the middle class.
“Consecutive rate hikes by the RBI this year were aimed at re-anchoring the inflation expectations and maintaining financial stability. Thus far, the rising cost of house ownership led by higher EMI, higher stamp duty and other factors has not affected real estate sales, which is a firm indicator of genuine demand for housing. But, any further hike in the repo rate might temporarily limit the growth momentum of the real estate sector,” he says.
“The sharp acceleration of rates consecutively for the sixth time in a short period will have a short-term effect on the sentiment of homebuyers as low interest rates have been the biggest factor in the resurgence for real estate demand in the last two years,” says Tridhaatu Realty co-founder & director Pritam Chivukula. Chivukula, who is also the treasurer-CREDAI MCHI.
“The state government should step-in again to lighten the homebuyer’s load by reducing stamp duty,” he adds.
