RBI Hike Impact: Home Loans May Get Costlier

Market and economy watchers are expressing concerns after the Monetary Policy Committee (MPC) of the Reserve Bank of India recommended a 25 basis points (bps) increase in the repo rate to 6.5 per cent. Experts said the continuous increase in repo rate will have impact on consumption demand and production possibilities in factories. "As world demand is slowing down, at this juncture, domestic demand is a major support to sustain the economic growth," said Saket Dalmia, President, PHD Chamber of Commerce and Industry. He hoped that there would be a pause in the policy rates going forward. "As inflation has been in a significant deceleration since the last many months, we look forward a pause in the policy rates. We need to focus more on reducing the cost of doing business as cost of capital is one of the high costs to businesses," Dalmia added.

With an MCLR rate of 8.4 per cent, about 60 per cent of the repo rate hike, so far, has already transmitted into the lending rates, experts said. "The borrowing costs have significantly increased across the product categories including the housing sector. Post today’s rate hike, borrowing costs could be expensive by another 10 – 15 bps, on an immediate basis," said Shishir Baijal, Chairman & Managing Director, Knight Frank India. However, Baijal concedes that the impact of interest rate hike on the housing sector has been limited thus far. "The Knight Frank affordability index has deteriorated marginally by an average 1.4 per cent over the last year. "Demand for home loans has remained strong during the last year, as seen in 16 per cent growth in December 2022. We hope that this rate hike will not adversely impact consumer sentiments towards home purchases in the coming financial year," Baijal added. 

Niranjan Hiranandani, National Vice Chairman- NAREDCO termed the move an "outrageous hike" since May 2021. He said this needed to be warranted before it turn negative for the ascending Indian economic growth curve. "The impact of home loan interest rate hike will be highly deterrent in the affordable housing segment as it will impact the price sensitive homebuyers and fatigue the supply of the developers. The luxury and mid housing segment players will remain cautious with a bit longer sales cycle,” Hiranandani said.

Anshuman Magazine, Chairman & CEO - India, South-East Asia, Middle East & Africa, CBRE said, “RBI’s decision to hike the repo rate by 25 basis points may be one of the last in the ongoing rate hike cycle, as we have witnessed inflation moving toward a comfortable zone. We do not expect any sweeping impact on the real estate sector or housing sales for now, given the demand has remained upbeat and the recent budget announcements will spur the growth momentum".

Kamlesh Shah, President, ANMI termed the increase "on expected lines". "All major indicators are showing stability; growth pegged at 7 per cent for current year and 6.4 per cent for FY 24; inflation appearing to be within range and projected to come down; both currency performance and FX reserves in better condition, overall policy is as per market expectations," said Shah who heads the Association of National Exchanges Members of India (ANMI).

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers said the 25 basis points rate hike was "in line with the consensus expectations". "We, however, felt the possibility of a rate pause this time around was at least 50 per cent. On the inflation front, the major softening in India post April 2022 was there main reason for us to expect a standstill in this policy," he added.

Experts felt that the Reserve Bank of India may have been bothered about the high and sticky core inflation for more than a year. More importantly, the continued rate hikes by the Bank of England, the ECB, and the US Federal Reserves and the implications of these in the foreign exchange market influenced the decision of the Reserve Bank of India to go for another rate hike, experts said. "Unless there is an unexpected flare in inflation, we would expect the Reserve Bank of India to maintain unchanged policy rate for the remainder of 2023. This would be positive both for the debt and equity markets,” Hajra stated.

Deepak Agrawal, CIO – Debt, Kotak Mahindra Asset Management Company believed this to be the last rate hike in this cycle. “RBI hiked rates by 25 bps in line with expectation by 4: 2 vote in favor of hike. Core Inflation and Financial Stability concern led to “withdrawal of accommodation” stance being maintained as against market consensus. Based on RBI forward looking FY 24 inflation forecast of 5.30%, at 6.5% repo rate, the real rate is 1.25 per cent. We believe this is the last rate hike in this cycle,” said Agrawal.

With this hike, RBI has raised interest rates by 250 bps from October 2020.

How will this impact the loan borrower? A direct impact of this increase will be an increase in the cost of borrowing for all types of loan. The impact on home loan borrower this time could not just be extension of home loan tenor but higher EMIs also, experts said. "By the time last repo rate hike was announced, the home loan tenor had increased from 20 years (original tenor) to 33 years (due to interest rate hike) which means if the borrower had age of 30 years at the time of availing home loan, the current increased loan tenor already would have surpassed their retirement age and now lenders will ask for increase in EMI in most of the cases. From personal finance point of view, it would mean higher outgo for home loan EMI," said Bhavik Thakkar, CEO of Abans Investment Managers.