RBI shocker – the beginning of the end of low-interest home loans

The RBI took a tough unscheduled decision – to increase the repo rate by 40 bps, bringing them to 4.40%. Overall, this was expected, as inflation has definitely moved into the threatening zone.

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RBI increase home loan repo rate
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With inflation edging higher in the aftermath of the Russia-Ukraine war and the surging oil prices, the RBI took a tough unscheduled decision – to increase the repo rate by 40 bps, bringing them to 4.40%. Overall, this was expected, as inflation has definitely moved into the threatening zone. Unfortunately, for home buyers, this hike signals an imminent end to the all-time low interest regime, which has been one of the major drivers behind home sales across the country since the pandemic began.

Moreover, rising interest rates and inflationary trends in basic raw materials in construction including cement, steel, labour cost etc. will add to the burden of the residential sector, which did significantly well in the previous quarter – Q1 2022.

This rise in interest rates will ultimately impact overall acquisition cost for homebuyers – and may dampen residential sales to some extent. The possibility of overall price hike was also highlighted in ANAROCK’s recent consumer survey wherein at least 56% of the respondents felt that property prices will increase in 2022.  Anuj Puri, Chairman – ANAROCK Group

A deep dive revealed that a price rise of >10% will have a ‘high impact’ on residential sales and <10% rise will have a ‘moderate-to-low impact’ on sales. The current sales velocity will thus be impacted by rise of >10% in overall acquisition costs..

These are the first signals of company’s revenues being impacted in the coming next quarters, if not years. All this has happened very quickly. The post-pandemic period has already passed and stamp duty has returned to normal. Even the challan payment discounts for corporate development have been restored to normal. So, if the house loan rates begin to rise because of the repo rate, the home loan rates will undoubtedly rise. As a result, the banks will follow suit, raising the cost of funds which will have an upward impact on the buyer’s affordability. This in-turn will have an effect on the developers’ sales. As a result, we as developers are hoping that the government devises a strategy to combat this. Otherwise, we will face challenging time, particularly in the approaching years.” — Mr.Rohit Gupta, CEO at Mantra Properties

The RBI has surprised the market with its two pronged approach of withdrawal of accommodation which is increase of repo rate by 40 bps and CRR by 50 bps. This is more in line with what the MPC spoke of withdrawal of accommodation in the April policy. This is indicative of the fact that there would be more such action taken over time depending on the evolving inflationary situation. We had expected 50 bps increase in repo rate in CY2022 but would now believe that there would be a further hike of 50 bps in the year. These twin measures hence affect both the quantum of surplus liquidity in the system as well as the cost of funds.

The hike in repo rate will help to quell the build-up of excess demand pressures and hence slow down the growth in inflation though it cannot affect some of the components that are driven by global factors.

The overarching focus on inflation is significant as it goes back to the normal mandate of the MPC which is to curb inflation as growth seems to be better placed today. But not tackling inflation now, growth can be jeopardized. This will be the main message from the so-called interim policy announced. — Madan Sabnavis, Chief Economist, Bank of Baroda

Related: Should You Buy a Home Despite Higher Prices?

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