The Accommodative Stance of RBI for Real Estate: Unchanged Interest Rates

The Reserve Bank of India (RBI) on April 8 kept borrowing costs unchanged at a record low for the 11th time in a row in a bid to continue supporting economic growth despite inflation edging higher in the aftermath of Russia’s war in Ukraine. This will ensure to maintain the current demand levels in the real estate sector,  as interest rates for both homebuyers and developers are likely to be maintained by their respective banking partners.

Given the global headwinds, the decision of RBI is going to be helpful and will ensure liquidity which will further boost the sentiments of property buyers. The continuation of the current repo rate regime would ensure that home loan rates remain low , which would come as a breather for developers who are facing rising construction costs.

Despite the disruptions from geo- political challenges as well as inflationary pressures, the RBI recognises the need to maintain economic growth momentum. For the real estate sector, low interest rates for a long period of time has served as a key catalyst for the resurgence of demand.

Developers’ input costs have been inflating steeply and a hike in property prices is not more or less inevitable. Nevertheless, the unchanged repo rate will continue to provide elbowroom to homebuyers, since home loan rates are at a record low. The housing sector saw a revival in 2021 and the continued low home loan rates can further propel homebuyers’ sentiments. The RBI hiked its reverse repo rate, which was expected due to inflationary tendencies seen in the economy.

However, the acquisition cost in Maharashtra has gone up by 1 percent on account of the metro cess applicable from this month. This impact will have to be balanced by the developers by attractive offers and interesting product range. The rise in construction costs will increase pressure on developers and may impact residential sales. The transmission of rising input costs to the homebuyers needs to be monitored. The stable mortgage rates are expected to provide temporary relief to the homebuyers, and it is to be seen how long this opportunity of low home loan interest rate prevails.

The decision by the RBI of maintaining the policy rate is a welcome step, but the hike in the reverse report rate to reduce liquidity in the system hints at a change in the policy rate and stance going forward. The reduction in the gap between repo and reverse repo rates is likely to lead to a gradual withdrawal of liquidity. There are indications that the opportunity for homebuyers to avail of low mortgage rates is shrinking in the short to medium term.

The current low home loan interest rate and individual housing loans’ risk weight guidelines which have been extended till 31 March 2023, will continue to be the ‘demand catalyst’ in the short term, ensuring sales velocity remains high despite the brief upwards revision in pricing of housing. An extension to PMAY – CLSS scheme till FY 2025 will augur well for the affordable housing segment.

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