RBI Monetary Policy: Repo Rate Hike Likely To Dampen Homebuyers' Sentiment

Rate hike may further impact affordable housing demand, says property consultancy firm ANAROCK

When the RBI raises interest rates, borrowing costs for buying real estate increase, which can reduce demand for housing. ( Image Source :Getty )

As the Reserve Bank of India (RBI) on Wednesday announced an increase of repo rate by 25 basis points to 6.5 per cent, the interest rate on home loans is expected to increase.

Anuj Puri, chairman, ANAROCK Group, a property consultancy firm, said that the 25 bps rate hike is much along the expected lines. "With repo rates now at 6.5 per cent, there could be some repercussions on housing uptake as home loan interest rates will head further north. The rates had already crept up after five consecutive rate hikes over the last one year. This will add to the financial burden on homebuyers as apart from home loan interest rates, property prices have also inched up in the recent past two to three quarters."

Repo rate is the rate at which the central bank lends money to commercial banks. Now, the lenders will have to pay a higher interest to the RBI on the loans they take from the central bank. It is expected that the banks will pass the rise to various loans given, including home loans.

Puri said, “Given that interest rates may breach Ratethe 9.5 per cent mark with today’s hike, we may see some pressure on sales volumes in the affordable and lower mid-range housing segments, which are more cost-conscious. The affordable segment has already been in the doldrums, and adding further to the cost of acquisition obviously does not help.”

He said the Indian housing market continues to be largely end-user driven - and end-users, unlike investors, focus less on ROI and more on the perceived value of homeownership. Furthermore, commodity prices are now falling and inflation is moderating. As such, we are unlikely to see any hikes in the near future, which will be positive for the housing sector in the times to come.

The monetary policy impacts real estate demand in several ways.

When the central bank raises interest rates, borrowing costs for buying real estate increase, which can reduce demand for housing. Conversely, when interest rates are low, borrowing costs are lower, and demand for real estate may increase. Also, an expansionary monetary policy, which increases the money supply, can lead to increased consumer spending and borrowing, potentially driving up demand for real estate.

In his speech, Governor Shaktikanta Das said the MPC decided 4:2 vote to remain focused on withdrawal of accommodative policy. "The global economic outlook doesn't look as grim now as it did a few months ago, growth prospects in major economies have improved while inflation is on a descent though inflation still remains on well-above target in major economies," he said, while adding "Rate hike of 25 bps is considered appropriate at this juncture, monetary policy to remain agile, alert to inflation."