RBI hikes repo rate: Home loans to get expensive, consumer demand to moderate

RBI hikes repo rate: Home loans to get expensive, consumer demand to moderate

Today's rate hike follows a 40-bps rise in early May at an unscheduled meeting that kicked off the central bank's tightening cycle

FPJ Web DeskUpdated: Friday, June 10, 2022, 05:01 PM IST
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Today's rate hike follows a 40-bps rise in early May at an unscheduled meeting that kicked off the central bank's tightening cycle, which economists expect to be relatively short | Image by InspiredImages from Pixabay

The Reserve Bank of India's key interest rate was raised by 50 basis points. This was the second hike in as many months, in a bid to cool persistently high inflation. The monetary policy committee (MPC) raised the key lending rate or the repo rate by 50 basis points (bps) to 4.90 percent.

The Standing Deposit Facility rate and the Marginal Standing Facility Rate were adjusted higher by the same quantum to 4.65 percent and 5.15 percent, respectively

Today's rate hike follows a 40-bps rise in early May at an unscheduled meeting that kicked off the central bank's tightening cycle, which economists expect to be relatively short. "Upside risks to inflation as highlighted in last policy meetings have materialized earlier than expected," Governor Shaktikanta Das said after the policy decision.

What does rate hike mean for consumers?

The rate hike will push up home loan interest rates, which had already begun creeping upward after the surprise monetary policy announcement last month. Interest rates will remain lower than during the global financial crisis of 2008, when they went as high as 12 percent and above. Nevertheless, the current hike will reflect in residential sales volumes in the months to come, more so in the affordable and mid-segments.

The recent off-cycle hike has had an impact on the housing sector which had started picking up after two years of a lull, and this increase is going to dampen the spirits of homebuyers.

Anuj Puri, Chairman, Anarock said, The silver lining is that the Indian housing market is still largely end-user driven, so there is no investor mindset seeking the lowest possible entry point. Genuine demand comes from an underlying aspiration for homeownership.

A repo rate hike of 50 bps was imminent given the current inflationary trajectory and geopolitical concerns. Shishir Baijal, Chairman & Managing Director, Knight Frank India said, From a real estate perspective, home loans are set to get costlier. Banks have already raised the interest rate on home loan by 30-40bps since the earlier repo rate hike by the RBI in May and now with the repo rate cumulatively higher by 90 basis point there will be further increase in interest rate for homebuyers. Rising interest rate along with elevated property construction cost and product price pressures could adversely impact on the real estate buyer’s sentiment.

Manufacturing sector to see pullback on numbers

The manufacturing sector will also see a pull back on the numbers as the retail purse strings tighten. An impact on the stock market is also inevitable, said Anjana Potti, Partner, J Sagar Associates (JSA). In May, after the surprise increase, the markets also saw a sharp downfall with the BSE falling more than 1,400 points and the NSE settling below 16,700, recording a fall of 391 points, leaving investors poorer by almost 6.27 lakh crores. However, one hopes that the investors are better prepared for the increase this time.

Higher rates are expected to moderate consumer demand, which may prevent higher producer prices from being passed on to customers going forward. However, this may squeeze corporate profits in the immediate term as they grapple with higher input prices and low demand from their consumers, said Rajiv Shastri, Director, and CEO, NJ AMC. Fiscal initiatives by the government may be needed to compensate for lower private consumption and sustain GDP growth at expected levels, which may result in higher government borrowings in the near term.

Interest on FD, govt bonds to come down

The further bump in the Repo Rate to 4.9 percent to battle inflation will bring huge investments into the real estate industry. Savvy investors will now stay away from fixed-income investments such as FDs and government bonds that are losing to inflation.

Food inflation may come down

The inflation has been above the RBI's target range of 2-6 percent since the beginning of the year. With the ongoing Ukraine war and the COVID issues in China, the supply chain disruptions continue to affect global inflation. The RBI has revised the inflation for FY23 to 6.7 percent, so inflation will continue to hurt the consumer pockets and company bottom-line for the coming quarters, said Raghvendra Nath, Managing Director – Ladderup Wealth Management Private Ltd.."We may see the food inflation coming down if the expectation of a normal monsoon this season turns out to be true. CRR was expected to be raised, but it seems RBI has decided to maintain the liquidity with banks for now.

Rentals on commercial real estate to go up

For those dampened by lowered interest on Fixed Deposits, government yields, the smart move at this point will be to diversify their portfolio using higher yielding assets like Commercial Real Estate. Kenish Shah, Co-Founder, PropReturns said, As seen in patterns before, rental yields in commercial real estate will be pushed up due to the sudden hike in interest rates and will become a powerful wealth creation tool for many investors. The hike in interest rates is a boon for the real estate industry.

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