MUMBAI: The Reserve Bank of India has raised its key interest rate (Repo) by 50 basis points, the second hike in two months, in a bid to douse high inflationary pressures.
(Repo rate is the rate at which the central bank lends short-term funds to banks. In line with the rate hike by the RBI, some banks and non-banking finance companies too raise their lending rates, which essentially leads to an increase in EMIs for borrowers.)
In the present situation, marked by high inflation and liquidity crunch, the existing and potential home buyers will have to shell out more money for the payment of equated monthly installments (EMI).
For instance, if a borrower has an outstanding SBI home loan of Rs 20 lakh for a term of 30 years at a current interest rate of 7.1 per cent, the EMI will increase from Rs 13,441 to Rs 14,675, a rise of Rs 1234, if the interest rate climbs from 7.1 per cent to 8%.
Even more worrisome, the RBI hike will impact the realty sector. Says ANAROCK Chairman Anuj Puri, ‘‘A hike was inevitable but we are now entering the red zone. Any future hikes will reflect markedly on housing sales.’’
He further notes: The rate hike will push up home loan interest rates, which had already begun creeping upward after the surprise monetary policy announcement last month. Of course, interest rates will remain lower than during the global financial crisis of 2008, when they went as high as 12% 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.’’
Axis Ecorp CEO and Director Aditya Kushwaha claims that the real estate sector had staged a spectacular comeback but the repo rate hike has the potential to thwart the growth. ‘‘This hike will push up home loan rates further and make EMI costlier. The sector is already feeling the heat from the mid cycle hike announced in May. The demand has been significantly impacted, and we believe that the current hike will have a far greater impact. The affordable housing segment will be affected the most through this hike, while the luxury and secondary home segments may remain immune,’’ he said.
Knight Frank India CMD Shishir Baijal said home loans are set to get costlier. ‘‘Rising interest rate along with elevated property construction cost and input price pressures could adversely impact the real estate buyers’ sentiment,’’ he added.
"The twin rate hikes by the apex bank would ultimately result in home loan interest rates going up, thereby impacting buyer sentiment," Dhruv Agarwala, CEO of Housing.com and PropTiger.com, said.
Inflation the bugbear
The RBI Governor also dropped his earlier insistence that the policy would remain 'accommodative', rekindling expectation that further rate hikes and other forms of tightening is likely in the ensuing months, with inflation remaining the bugbear.
Retail inflation in April accelerated to 7.79% from a year earlier, above the RBI's tolerance threshold for inflation of 2% to 6% for a fourth month in a row; a further rise in global prices of crude oil, food and other commodities is expected to keep up the upward pressure.
The RBI had raised its inflation projection for this fiscal to 6.7% from 5.7% earlier, and Governor Shaktikanta Das said it is expected to remain above the upper tolerance band in the first three quarters.
"We have dropped the word (accommodative) but we remain accommodative and that is mainly to give greater clarity to the market," Das said.
"The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth," he said adding that liquidity still remains above pre-pandemic levels.
The price spikes have hammered consumer spending and darkened the near-term outlook for India's economic growth, which slowed to the lowest in a year in the first three months of 2022.
However, Das said India's recovery is proceeding and the RBI maintained its 2022/2023 growth projection at 7.2%.
India's 10-year benchmark bond yield fell to a low of 7.43% from the day's high of 7.56% after the policy decision, while the rupee weakened to 77.7850 per dollar, just off its life low of 77.7975.
Bond markets have been worried about the Indian government's record market borrowing plans this year. Though the RBI announced no specific measures on Wednesday, Das said the RBI will take steps as needed to ensure that borrowing goes smoothly.
