On December 6, 2024, the Reserve Bank of India (RBI) announced its fifth bi-monthly monetary policy for FY25, maintaining the benchmark repo rate at 6.5%. This decision marks the eleventh consecutive meeting where the central bank has opted for stability, continuing its neutral stance amidst global uncertainties and domestic inflationary pressures. The RBI’s decision to hold the repo rate unchanged brings mixed reactions, especially from the real estate sector, as stakeholders weigh the potential effects on borrowing costs, affordability, and demand.
Stability in Borrowing Costs
For developers and homebuyers alike, the unchanged repo rate ensures stability in borrowing costs. With the rate at 6.5%, developers benefit from consistent financing conditions, allowing them to plan projects and investments with greater certainty. Similarly, homebuyers can count on steady mortgage rates, which helps maintain buyer sentiment in a challenging economic environment.
The neutral stance from the RBI reflects a careful balancing act—keeping inflation under control without stifling economic growth. While this strategy helps create a stable economic environment, it also means that home loan borrowers will continue to pay relatively high Equated Monthly Installments (EMIs), limiting affordability for many potential buyers. This dampens hopes for an increase in demand, particularly among first-time homebuyers who could have been encouraged by lower interest rates.
Developer Optimism Amid Government Initiatives
Despite the absence of a rate cut, developers remain cautiously optimistic about the sector’s growth trajectory. Government initiatives, including infrastructure development and urbanization, continue to support the real estate market. The sector has already seen significant investments, particularly in the residential segment, thanks to the current interest rate levels.
The neutral stance is seen as a boon for the affordable and mid-segment housing markets. It ensures that demand remains stable, even as the sector contends with inflationary pressures and price fluctuations in raw materials. Developers also hope that the government will offer more incentives, such as tax relief and policy support, to further stimulate demand.
“The RBI’s decision to maintain the repo rate at 6.5% reflects a measured approach to managing inflation without hampering economic growth. The neutral stance provides much-needed stability in the financial markets, which is crucial for the real estate sector. The unchanged rates will help maintain buyer sentiment, especially in the affordable and mid-segment housing categories,” said the President of NAREDCO Maharashtra.
The RBI’s approach is also seen as a positive signal for commercial real estate, with steady borrowing costs supporting momentum across both residential and office segments. Developers continue to launch new projects, and investor confidence remains high, particularly in grade-A office spaces.
Benefits for Luxury and Holiday Homes
While the neutral stance on rates ensures stability for most segments, it is especially favorable for the luxury and holiday home markets. Stable interest rates enhance buyer confidence, making it easier for potential investors to commit to high-end real estate. Markets in emerging areas such as Alibaug and Lonavala, which have witnessed increasing interest in luxury properties, stand to benefit from this stability.
“The decision to keep the repo rate unchanged is a welcome move, especially for the luxury and holiday home markets. Stability in interest rates enhances buyer confidence, particularly in emerging markets like Alibaug and Lonavala, which have been witnessing increased interest in these segments,” said the Founder of Iraah Lifespaces.
As buyers in premium segments are less sensitive to changes in interest rates, they are more likely to proceed with transactions despite the overall economic uncertainty. This stability also helps developers plan innovative and high-value projects without the pressure of fluctuating interest rates.
Challenges in Affordable Housing
The absence of an expected rate cut is disappointing for those in the affordable housing sector, where lower interest rates could have spurred greater demand. Higher home loan rates continue to impact the affordability of homes for the middle and lower-income segments. Industry leaders had hoped that a reduction in the repo rate would ease liquidity and provide an additional push to the housing sector, particularly for affordable housing projects.
The Co-Founder and CEO of Build Capital emphasized that while the neutral stance is a positive for maintaining steady borrowing costs, the industry also looks forward to long-term measures that could enhance liquidity and credit flow in the market.
“The RBI’s neutral stance and focus on balancing inflation and growth are positive signals for the real estate sector, ensuring stable home loan rates as well. With repo rates unchanged, stable borrowing costs will sustain momentum across residential and commercial segments. We urge the RBI to consider long-term measures to enhance liquidity and credit flow in the industry,” said the CEO of Build Capital.
Liquidity Support via CRR Cut
In a related move, the RBI reduced the Cash Reserve Ratio (CRR) by 50 basis points to 4%. This reduction enhances the liquidity available to banks, allowing them to lend more to the real estate sector. While the rate cut was not as significant as many hoped, the CRR reduction is expected to provide a boost to credit disbursements, especially in sectors like real estate, where financing plays a crucial role.
Anuj Puri, Chairman of ANAROCK Group, noted that while a repo rate cut would have provided a more immediate stimulus to housing sales, the CRR reduction could still have a positive impact by improving credit flow. He added that the sector was already buoyed by pent-up demand and improved affordability, with many expecting that the final quarter of the financial year would continue to show strong housing sales.
Impact on Major Markets
The unchanged repo rate ensures that large markets such as Mumbai and Pune will continue to see sustained demand, even as home prices rise. As per reports, average housing prices in major cities had already increased by 23% in the third quarter of 2024. In this scenario, the stability in interest rates ensures that homebuyers are not deterred by rapidly rising costs, while developers are not forced to hike prices further.
“Stability in interest rates is particularly beneficial for high-value markets like Mumbai and Pune. With steady interest rates, buyer confidence will likely increase, driving steady demand and supporting sector growth,” said the Joint Managing Director of Supreme Universal.
In Mumbai, the residential real estate market is seeing strong momentum, with low unsold inventory and a continued demand from end-users. Infrastructure projects such as metro expansions are expected to further boost the demand for housing in key residential areas.
Looking Ahead
While the RBI’s decision to hold the repo rate steady was expected, it has left some segments of the real estate market hoping for more decisive action. As developers continue to navigate a challenging economic environment, they are calling for more government support, particularly in terms of tax incentives, faster approvals, and more favorable liquidity conditions. The sector’s optimism remains high, buoyed by robust demand across urban markets and government-backed infrastructure initiatives.
“The RBI’s decision to retain the repo rate at 6.5% is a balanced approach to manage growth and inflation. With India’s GDP expected to grow at 6.5–7% in FY 2024-25, this stability is vital for maintaining economic momentum. A steady rate ensures consistent repayment terms, which increases the confidence of homebuyers and encourages investments in the sector,” said the Vice Chairperson of Nahar Group.
Overall, the RBI’s neutral stance on the repo rate is seen as a double-edged sword for the real estate sector. While stability in borrowing costs provides confidence to developers and homebuyers, the lack of a rate cut means that affordability challenges remain for many. Nevertheless, the sector remains resilient, with stakeholders expressing hope that the government will continue to offer supportive policies to sustain growth in the coming years.
