Home and car loan EMIs are set to increase as the Reserve Bank of India (RBI) on Wednesday hiked the repo rate by 40 basis points in a surprise move.

For homebuyers, the hike in key policy rate 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, says Anuj Puri, chairman at ANAROCK Group.

The rise in interest rates will ultimately impact overall acquisition cost for homebuyers and may dampen residential sales to some extent, says Puri. "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," he says.

Puri, however, adds this increase in the repo rate was expected as inflation has definitely moved into the threatening zone.

While announcing the repo rate hike, RBI governor Shaktikanta Das cited geopolitical tensions due to the Russia-Ukraine war as one of the reasons for alarming levels of inflation. "Inflation-sensitive items relevant to India such as edible oils are facing shortages due to conflict in Europe and export ban by key producers. The jump in fertiliser prices and other input costs has a direct impact on food prices in India," Das says.

The interest rate hike amid rising input costs is expected to have its impact on real estate, according to Gulam Zia, senior executive director at Knight Frank India. "The sector has vastly benefited by the low interest rates in the last two years. This policy rate hike will translate into higher EMIs for home loans."

Agrees Ramani Sastri, chairman and managing director at Sterling Developers. "The increase in repo rate will likely have an impact on the industry as residential demand has been positively revived in the post pandemic context and needs to be fostered. It also goes without saying that the real estate industry's perennial hope is fixed on lower interest rates as it improves affordability and also provides the required fuel for the growth of the economy along with the real estate sector, which is allied with several other industries," Sastri says.

Zia, however, expects an improved homebuyer attitude, preference for owning a house and strong wage growth to support the housing market. "The monetary policy stance is still accommodative and with the receding pandemic and economic growth, we expect that consumer demand will remain buoyant in the near term," he adds.

The rate hike was inevitable, with central banks across the globe resorting to rate hikes to maintain inflationary pressure created due to various global factors, says Shrey Aeren, MD and country head of Berkshire Hathaway Home Services Orenda.

"Builders across Delhi/NCR have increased rates of properties by almost 10% recently due to an increase in input cost. This rate hike will have a limited impact on residential sales as the housing market has already acclimatised itself to expectations of this rate hike by the apex bank," says Aeren. "We also foresee that several banks may absorb full or part of the rate hike to keep home loan borrowing rates at attractive levels."

Industry lobby PHD Chamber of Commerce and Industry called the rate hike "disappointing". The move will hurt consumer and business sentiment as the economy is still recovering from the pandemic, says Pradeep Multani, president of PHD Chamber of Commerce and Industry.

The body urged RBI to remain "accommodative" and bring down the repo rate to the level of 4%. "Any increase in the interest rate will further impact the costs of doing business, which are already high viz-a-viz high raw material cost," Multani adds.

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