RBI Keeps Repo Rate Unchanged at 6.5%—Relief For Homebuyers  

The Reserve Bank of India's (RBI) decision to keep the repo rate unchanged at 6.5 per cent in its first bi-monthly monetary policy review of FY24 on Thursday has brought cheer to many homebuyers who have been struggling against higher home loan interest rates.  

The repo rate is at which the RBI lends money to commercial banks. When the repo rate is high, banks have to pay more to borrow money from the RBI, and this cost is passed on to customers in the form of higher interest rates on loans. Conversely, when the repo rate is low, banks can borrow money at a lower cost and offer loans at a lower interest rate.  

Says Anuj Puri, chairman of Anarock group, in a statement: "Much against general expectations, the RBI decided to keep the repo rates unchanged at 6.5 per cent today. This is good for the residential real estate market, which faces a tough road ahead amid massive layoffs by large corporates worldwide. India is not decoupled from global economic dynamics and their invariable impact on the housing uptake here. The RBI's decision comes as a welcome respite to homebuyers." 

"This particularly gives relief to affordable and mid-segment homebuyers who feared a possible rate hike today, making property buying via home loans even harder. As is, affordable housing has been under stress since the pandemic. This segment (units priced less than Rs 40 lakh) saw its overall sales share dip between 2019 and 2022 and during Q1 of 2023. Anarock Research indicates that in 2019, out of the total sales of nearly 2,61,400 units across the top 7 cities, nearly 38 per cent of sales were in the affordable segment," adds Puri.  

RBI's decision to keep the repo rate unchanged will benefit homebuyers facing higher interest rates on their home loans, which are a long-term commitment. Even a slight reduction in the interest rate can translate into significant savings over the loan tenure.  

Expert Views  

According to experts, this pause will help borrowers assess their current liabilities in the face of the 2.5 per cent increase over the past year and devise strategies to optimise their interest outflow and tenor increases.

"It is important to understand that a 2.5 per cent hike implies that the EMIs 9 equated monthly instalments) have gone up by approximately 16 per cent in the case of a 15-year loan, 20 per cent in the case of a 20-year loan, and 26.5 per cent in the case of a 30-year loan. This will have an impact on the eligibility of the borrowers and hence their purchasing power. For existing borrowers, this means higher EMIs, longer tenors, and in most cases, both at once. Many borrowers, especially those at the beginning of their loans have seen their tenors increase instead of decrease over the last one year despite timely repayments. At the same time, spreads on the benchmark rate have been falling over the last year, from 3.5 per cent before the pandemic to 1.9 per cent currently," says Adhil Shetty, CEO of BankBazaar.com. 

He further explains, "So, if your loan is two-three years old or older, you stand to gain a good reduction on your interest rate on refinancing if you have a good repayment track record and credit score. Given the high-interest scenario, your best option in such a case is to refinance at a lower rate and retain a higher EMI. This will help you keep down the costs of borrowing."

Arijit Sen, a Sebi-registered investment advisor and co-founder of Merry Mind, a Kolkata-based financial advisory firm, adds: "Considering inflationary pressure and global economic scenario, the central bank has raised repo rates by 2.5 per cent since May last year. Borrowers have been bearing the brunt of increasing borrowing costs. Due to inflationary pressure, family expenses have shot up. Thus, many were not able to increase their home loan EMI. The interest component kept climbing while the EMI's principal component has been squeezing since May last year, even when repo rates were hiked. As a result, if EMI were not increased or partial pre-payment was not done, the loan tenure was getting extended. This has been adding to the misery of having a loan burden. The RBI's decision to keep the repo rate unchanged at 6.5 per cent is no doubt a breather for borrowers. The home loan rates are expected to remain as it is until the next move by The Reserve Bank of India."

However, it is important to note that the RBI's decision to keep the repo rate unchanged does not necessarily mean that home loan borrowers will immediately get a respite from increasing interest rates. This is because the final interest rate on a home loan is determined by various factors, including the borrower's credit score, income, and loan amount. In addition, banks and other financial institutions also have lending policies, which can impact the interest rate they offer borrowers.  

That being said, this move is expected to impact the overall lending rates in the market positively. Banks and other financial institutions will likely keep their lending rates at similar levels, with the repo rate remaining stable. This could make it easier for homebuyers to find affordable home loan options.  

Rising home loan interest rates have become a growing concern for home buyers and supply-side stakeholders. "To some extent, the higher home loan interest rates have dampened the demand for affordable and mid-segment housing as buyers in these segments are more price-sensitive. While the luxury and high-end segments have not been significantly impacted yet, further increases could have affected the overall industry. We remain optimistic that inflation will come under control and there will be no further increase in policy rates," says Amit Goyal, CEO of Sotheby's International Realty, in a statement.  

Reiterates Raj Khosla, founder and managing director of MyMoneyMantra.com, a loan aggregator: "Unchanged repo rate will ensure that banks & NBFCs will not increase lending rates. Therefore there will be a welcome respite for borrowers. Generally speaking, there will also be a pause on inflationary pressures. However, I don't rule out another hike later this year."  

According to experts, the RBI's choice to leave policy rates unchanged is a significant relief for prospective homebuyers and supply-side stakeholders. "The past three quarters have seen a gradual rise in home loan interest rates, causing a significant impact on borrowers as rates have surged to over nine per cent, marking a 40-50 per cent increase from their historical low. Any additional policy rate hike could push home loan interest rates even closer to the psychological threshold of 10 per cent per annum, substantially impacting buyer sentiments and affordability," says Pradeep Aggarwal, founder and chairman of Signature Global, in a statement.  

"Given the increase in home loan interest rates, we strongly encourage state governments to provide some relief to homebuyers by offering stamp duty rebates or registration fee waivers. Such measures would help mitigate the financial burden on buyers and make homes more affordable for those looking to buy their home," he adds. 

However, Abhishek Kumar, founder and chief investment advisor at SahajMoney, a financial planning firm, says the CPI inflation is still above RBI's upper tolerance level of six per cent, although the repo rate stayed at the same level. So the borrowers should brace for more rate hikes until it is brought under control below six per cent. "Future repo rate hikes would force the hand of lenders further to increase the interest rate on the home loans. So borrowers are caught between a rock and a hard place. Due to inflation, their surplus savings is lower and more monthly payout due to EMI," says Kumar.