RBI leaves repo rate unchanged at 6.50%

The Reserve Bank of India (RBI), on April 6, 2023, decided to leave the repo rate unchanged at 6.5%. Most experts had predicted the banking regulator would increase the repo rate, at which it lends funds to banks by 25 basis points in its first bi-monthly policy for the financial year 2023-24 on April 6, 2023, amid concerns about stubbornly high inflation.

Nearly two-thirds of respondents who took part in a February 14-21 Reuters poll expected the RBI to raise rates to a seven-year high of 6.75% in April, adding that it would then keep the rate steady for the rest of 2023.

Official data released on March 13, 2023, show retail inflation in February was at 6.44%, a slight dip from January’s 6.52%. This indicates prices for various goods and services remained high across most categories. This also means the CPI-based inflation rate has been above the RBI’s medium-term target of 6% for nine months this financial year.

However, industry bodies like ASSOCHAM and CREDAI has urged the central bank to maintain a status quo on its benchmark lending rates to support growth.

“There are suggestions from some quarters about another 25 bps increase in the repo rate by the RBI Monetary Policy Committee. We feel the economy has reached a saturation point beyond which it may be difficult to absorb any more rate hike. Rate sensitive sectors like real estate, including residential complexes, passenger cars, commercial vehicles may see negative impact of the rate hike,” Assocham president Ajay Singh said on April 5, 2023.

“Another hike in the repo rate would lead to even higher borrowing costs for developers and make it a more challenging lending environment. This would ultimately lead to even higher project costs and housing prices, on the back of prices already increasing by 5-6% in the last one year. Coupled with rising raw material costs, it would further reduce the wafer-thin margins that currently exist for real estate projects, making certain projects financially unfeasible for developers,” the Credai said in a statement issued in March 2023.

Builders welcome RBI move

Welcoming the RBI move to maintain the repo rate at 6.5%, NARDECO national vice-president Niranjan Hiranandani said: “India Inc. applauds the RBI’s decision to pause the rate hike cycle. This act of relief will restore confidence in homebuyers’ sentiment and boost demand rally in the real estate.”

The market has been stable after a period of volatility, and this decision will be big relief for homebuyers, says Ashar Group director Ayushi Ashar.

How does the move impact home loan borrowers?

If the RBI were to increase the repo rate on April 6, banks would have passed on the burden, bringing interest rates to an all-time high. However, with the RBI maintaining a status quo, borrowers can heave a sign of relief.

Since May 2022, the RBI has increased the repo rate, at which it lends funds to financial institutions in India, by 250 basis points (bps). If the RBI were to go for another 25-basis point increase, the repo rate would be 6.75% as against 6.50% currently.

“Home loan interest rates are already at an alarmingly higher level of 9.5% and above due to the increase in the repo rate in the recent past. Another increase in policy rates would have meant that interest rates on home loans hit an all-time high and touch almost double-digit which could have a substantial impact on buyer sentiments and affordability,” says Ramani Sastri, CMD, Sterling Developers.

“A cut in the key rates in future would be widely appreciated as low-interest rates have played a crucial role in the revival of overall real estate demand and improvement in the liquidity situation,” he adds.