This is the second time that the Reserve Bank of India (RBI) has not hiked rates. The central bank first paused the rate hike cycle in its April monetary policy committee (MPC) meet. The decision comes in light of the notable correction in the Consumer Price Index (CPI) inflation trajectory.
Typically, when inflation is high, RBI tends to increase the repo rate. This discourages commercial banks from borrowing money from the RBI, leading to reduced liquidity in the market and aiding in inflation control.
However, home loan interest rates are on the higher side, and it is important for borrowers to relook at strategies now that rate hikes have been paused.
We tell you why the pause in rate hikes is good news for borrowers and why even the real estate industry which expects a continuation in home sales momentum.
How Do Repo Rates Affect Home Loan EMIs?
The impact of the repo rate on home loans is significant, particularly in India where home loans often have floating interest rates linked to external benchmarks, including the repo rate.
Hence, alterations in the repo rate directly impacts the rate of interest on home loans with floating rates of interest.
The repo rate acts as a reference point for interest rates in the banking industry given that it is the rate at which RBI lends funds to other banks.
For borrowers with floating-rate home loans, any alteration in the repo rate will cause a corresponding change in their home loan interest rates, directly affecting their equated monthly instalments (EMIs).
When the RBI reduces the repo rate, it becomes cheaper for commercial banks to borrow funds from the central bank. Consequently, banks may lower their lending rates, including the interest rates on home loans. This reduction in interest rates results in lower EMIs for borrowers.
Conversely, when RBI increases the repo rate, banks’ borrowing costs rise. To maintain profitability, banks may raise their lending rates, including the interest rates on floating-rate home loans. This leads to higher EMIs for borrowers, increasing the overall cost of their home loan.
It’s also important to note that some borrowers opt for fixed-interest rate home loans, where the interest rate remains constant throughout the loan tenure. During the fixed-rate period, adjustments in the repo rate do not have an immediate impact on the EMIs.
Homebuyers, Real Estate Industry Cheer
Anuj Puri, chairman, Anarock Group, said that RBI move was expected and would have a positive impact on house sales.
“The RBI has announced its decision to maintain the repo rates at 6.5 per cent, offering relief to prospective homebuyers seeking loans. This unchanged repo rate is expected to sustain the robust momentum in housing sales witnessed throughout 2023, making it a favourable outlook for first-time homebuyers.”
Adhil Shetty, CEO of Bankbazaar, added: “Today’s announcement brings respite to home loan borrowers who have been experiencing increased loan EMIs and extended tenures due to previous rate hikes. Since loan tenures cannot be extended beyond the borrower’s retirement age, the only option lenders have is to raise EMIs, which may not be viable for many borrowers. Lowering their debt burden should be the primary concern for borrowers at this point. Refinancing to a lower rate can directly help tackle this issue. Loan spreads, which are the rates banks charge over the repo rate, are currently at their lowest, at 1.90 per cent. A lower rate can help control the rise in loan tenure and save borrowers money. Additionally, if possible, borrowers can consider voluntarily increasing their EMIs or prepaying 5 per cent of their loan balance each year to reduce their debt burden.”
Piyush Bothra, co-founder and CFO of Square Yards said the RBI’s decision to maintain the status quo for the second time was welcome and aligns with the real estate industry’s expectations.
“This confirms the belief that interest rates will continue to decrease in the future. This is a positive outcome for homebuyers, as they can anticipate a decrease in their EMIs. Many potential buyers who were waiting on the sidelines are expected to enter the market, and developers are likely to benefit from this pent-up demand. We firmly believe that we are at the beginning of a multi-year real estate bull market, driven by high disposable incomes, affordability, and moderate-to-low interest rates.”
While the RBI’s move offers relief to prospective homebuyers and helps maintain housing sales momentum, existing borrowers may continue to experience the same interest rates and EMIs.
However, borrowers can explore options such as refinancing, lowering loan spreads, and increasing EMIs or prepayments to manage their debt burden effectively. Nevertheless, the unchanged repo rate will impart stability to the home loan market, thus allowing borrowers to plan their finances accordingly.