Take It From Torbit - Cushioning Home Buyers Against High Property Prices- Transmission Of Rate Cuts Holds The Key

The recent 25 bps rate cut to 5.25% undertaken by the RBI, has provided a much-needed relief to home buyers (especially in affordable and mid-segment category) and developers in the wake of drop in overall sales, particularly sharp decline in sales and supply of affordable homes. When combined with 150 bps cumulative reduction since February 2025, the rate cut comes as a relief following elevated EMIs over the last couple of years. However, the real gain will depend on the faster transmission of rate cuts.

The rate cut couldn't have come at a more opportune time when inflation is restrained and the economy is in good health. Moreover, the depressed housing sales. needed a trigger in the festive quarter for providing momentum to the overall housing sales during FY26.

It is significant to mention that in the first nine months of 2025, overall housing sales fell 12% YoY and affordable housing lost a significant share of supply and sales at the cost of luxury /premium housing gaining its share. As a matter of concern, the supply and sale share of affordable housing has been consistently on decline over the last 4-5 years. Affordable housing below INR 40 lakh, saw its sales share falling to 18% from 38% in 2019. The affordable housing supply share dipped to 12% of new launches in H1 2025, down from 40% in 2019. On the other hand, luxury housing sales rose to 30% while premium housing sales shot up to 62% of overall housing sales. In H1 2025, luxury housing sales surged 85% YoY while luxury supply during this period rose 30%.

In this backdrop, faster transmission of policy rates assumes significance particularly as against repo rate reduction of 100 bps between February and June 2025, the transmission for fresh loans has amounted to 53 bps whereas for outstanding loans, it stood at 49 bps. Further, banks have been taking to active repricing of new loans at higher levels, facilitated by the completion of repo-linked resets and a gradual easing in the MCLR-based lending rates. It may be seen as an effort by banks to improve profitability with lending rates being raised across the system. In October a 14-bps hike was done, taking interest rate to 8.64% from 8.5% in September.

It is pertinent to mention that home loans linked to an external benchmark (EBLR) such as floating rate home loans have a faster and more direct transmission. Banks have matched the reduction in repo-linked lending rates with the magnitude of policy rate cuts. On the other hand Marginal Cost of Funds Lending Rate (MCLR) has a larger reset period and transmission takes time. The cumulative rate cuts undertaken in FY 26 have not been fully transmitted.

However, it is heartening that the RBI is taking liquidity measures to boost transmission. In September end, RBI took a policy decision to allow banks to reduce spread component on loans offered before 3 years. The spread depends upon borrower's credit risk profile, operating cost and loan tenure. The new norms which came into effect from October 1, will benefit existing customers, further aiding monetary policy transmission. These new norms will also help in policy transmission in the outstanding loans. What more, RBI is taking liquidity measures to ensure faster transmission of policy rates. Along with 25 bps rate cut announced by the RBI in its December credit policy, it has announced key policy measures of OMO (open market operations). In order to infuse durable liquidity into the banking system, measures like purchase of government securities worth 1 lakh crore and a USD 5 billion buy/sell swap, are taken.

Now that another rate cut is likely in this financial year, the measures being taken by the RBI to speed up the transmission of rate cuts will further boost the market sentiment, involve property buyers, developers and investors and strengthen housing sales and supply side towards healthy and sustainable growth of real estate in the new year.

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