Unchanged repo rate leaves home buyers unconvinced about banks being flush with funds


Following the sops for affordable housing in Budget 2017, home buyers seem unhappy with the RBI’s decision not to cut key rates in its monetary policy review, which could have made home loans cheaper. We examine the pros and cons of the RBI’s status quo on rates

The Reserve Bank of India (RBI) on Wednesday, February 8, 2017, surprised the market by keeping the repo rate unchanged at 6.25% in its monetary policy review. This has disappointed the market in general and home buyers, in particular. The news of the unchanged rate has come as a dampener for home buyers, who were expecting some substantial sops after the measures in the Union Budget to boost affordable housing. Home buyers were hopeful that lower repo rates, would leading to cheaper home loans.

“Ever since the demonetisation exercise began, we have been told that the move will be beneficial for home buyers like us. Authorities and experts have been saying that banks will now be flush with funds and it would lead to lower interest rates on home loans. However, the status quo on rates, has not been in sync with the general perception of the market,” rues Swati Chopra, a prospective home buyer in Gurgaon.

 

The arguments in favour of an interest rate cut

The real estate industry’s reaction has also been that of concern. Anshuman Magazine, chairman – India and south-east Asia, CBRE, admits that the decision to keep the repo rate unchanged has come as a surprise.

“While the recent demonetisation drive has brought the necessary liquidity into the banks, lowering the repo rate would have helped ease borrowing costs. This would have provided an added thrust to the government’s initiatives for affordable housing and fuelled demand. A low inflation rate amidst the slowdown in projected economic growth, provided a conducive environment to reduce rates,” says Magazine.

See also: Is the post demonetisation period, a good time to invest in property?

Nikhil Hawelia, managing director of Hawelia Group, feels that the status quo on the repo rate is inexplicable, especially after the announcements in the budget towards affordable housing. According to him, if the government is really serious about affordable housing, then, along with incentivising the developers to create the housing stock, they should also incentivise the home buyers with lower cost of borrowing.

“The status quo on repo rate, means that the market will remain standstill for one more quarter. As developers of affordable housing, we were expecting a sharp cut. There are reasons for all the stakeholders to feel disappointed,” says Hawelia.

 

Why the RBI’s status quo on policy rates was not unexpected

Vineet Relia, managing director of SARE Homes, points out that while the RBI’s decision to keep the repo rate unchanged at 6.25% is disappointing, it is not unexpected. The fact that credit growth has slipped to multi-year lows, despite lending rates falling by nearly 150 basis points since early 2015, is proof that other factors are at play.

“Demonetisation has accelerated the transmission of rate cuts over the past two months. While it has benefited select borrowers, it has squeezed the incomes for most savers, with deposit rates plummeting over two percentage points over the past two years. A cut in policy rate, may do more harm than good, if inflation creeps up owing to a rise in global commodity prices,” Relia explains.

A rate cut at this stage, would have helped in lowering home loan interest rates further, after most banks cut down their lending rates in past couple of months. Home buyers too, are asking whether the rate was kept on hold, to assess the impact of demonetisation on inflation. If that is the case, then, the theory that demonetisation has made banks flush with funds, may not hold ground. Experts agree that the country needs positive interest rates, to boost investments and induce savings. However, as demand in real estate and its allied industries remains sluggish, a rate cut could have helped to improve liquidity and renewed interest in property purchase. The status quo, hence, may reflect that all is not that well with the Indian economy.

 

Why home buyers are unhappy with the repo rate remaining unchanged

  • Demonetisation has impacted home buyers’ cash flows severely.
  • Buyers are asking: What is the benefit of banks being flush with funds, if the cost of borrowing does not reduce?
  • The Union Budget 2017-18 provided several measures to boost affordable housing. However, buyers have not been incentivised with lower interest rates.
  • A lower interest rate, could also fuel consumption demand and revitalise the economy.

(The writer is CEO, Track2Realty)

 

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