The Reserve Bank of India’s (RBI) monetary policy committee (MPC) on December 7 hiked the repo rate by 35 basis points (bps) to 6.25 per cent. It is the fifth straight rate hike by the central bank in this financial year. Prior to this, the RBI had raised the repo rate by 40 bps in an off-cycle meeting in May and 50 bps in June, August and September. Today, the MPC raised the retail inflation forecast for October-December 2022 period to 6.6 per cent from 6.5 per cent. The retail inflation forecast for January-March 2023 period was raised to 5.9 per cent from 5.8 per cent. The MPC retained the retail inflation forecast for the first quarter of 2023-24 at 5 per cent and kept it at 5.4 per cent for the second quarter of FY24.
But the continuous rate hikes may lead to short-term impact in the overall housing demand when buyers are optimistic of making a home purchase decision and this may add to buyers’ overall acquisition cost. The equated monthly installments (EMI) for existing borrowers is likely to go up further immediately, especially for those who have floating rate home loans linked to an external benchmark lending rate if the central bank hikes the repo rate this month. The real estate sector had started seeing gradual recovery across key property markets, driven primarily by end-users. However, the repeated rate hikes may impact the interest rate-sensitive sector. Low interest rates have been one of the major factors in the resurgence of real estate demand in the last few years and hence the rate hike would mean a hurdle in affordability.
Whenever, the central bank hikes the repo rate, most of the lenders pass on a higher rate to borrowers. Since the rate hike cycle in May 2022, home loan products have become expensive by around 150 bps before today’s hike. With repo rates now at 6.25 per cent, there may be some repercussions on housing uptake. This hike will undoubtedly push up home loan interest rates, which had already crept up after four consecutive rate hikes this year. However, as long as interest rates remain in single digits (mainly within 9.5 per cent) the impact on housing will at best be moderate. If they breach this point, we will see some real pressure on residential sales volumes in the months to come – especially in the affordable and lower mid-range housing segments.