RBI's U-turn: Is it the end of low interest rates on home loans?

With inflation edging higher in the aftermath of the Russia-Ukraine war and the surging oil prices, the Reserve Bank of India made an unscheduled announcement on monetary policy on Wednesday. The Monetary Policy Committee of the RBI met on an off-cycle basis and decided to hike the repo rate by 40 basis points to 4.40%. Overall, this was expected, as inflation moved into the threatening zone with a rise of 6.95% in March. Unfortunately, for homebuyers, 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.

The RBI also decided to hike the CRR by 50 bps to 4.5%. This is a remarkable turn of events from the RBI. When the MPC announced the last policy on April 8, it indicated that there would be a withdrawal of accommodation. But an intra-meeting hike does suggest that the MPC members were perhaps more hawkish than that statement and the following minutes suggested.

The real estate sector has benefited immensely from the low interest rates in the last two years. But the rising interest rates, says Anuj Puri, chairman, ANAROCK Group, 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, i.e. Q1 2022.

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

ANAROCK’s recent consumer survey had also indicated the possibility of overall price hike wherein at least 56% of the respondents felt that property prices will increase in 2022.

The policy rate hike will translate into higher EMIs for home loans, says Gulam Zia, senior executive director, Knight Frank India.

A price rise of more than 10%, as per Anuj Puri, will have a high impact on residential sales and a price rise of less than 10% will have a moderate-to-low impact on sales. "The current sales velocity will thus be impacted by a rise of greater than 10% in overall acquisition costs," he adds.

Industry participants however, have high hopes from the government. 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. Ramani Sastri, chairman and MD, Sterling Developers, remains positive and hopes that the government continues to provide the required support that the industry requires.

Gulam Zia, senior executive director, Knight Frank India, is optimistic that improved homebuyer attitude, preference for owning a house and strong wage growth will continue 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 says.