By Dr. Samantak Das, Chief Economist and Head of research and REIS, JLL, India
RBI’s repo rate increase of 50 bps for the fourth consecutive time
The decision by RBI to increase the repo rate by 50 bps for the fourth consecutive time to 5.90 % is along the expected lines as the Central Bank aims to rein in inflation, maintain global interest rates parity and ensure the stability of the currency. Retail inflation has been hovering above RBI’s upper target of 6% since February 2022 with the recent August number at 7%. The rate hike is intended to arrest the persistent rise in inflation which is impacting economic growth. The Fed interest rate hike and its outlook have also prompted RBI to take this step. The GDP outlook has been marginally lowered to 7.0% for the financial year 2022-23 from an earlier forecast of 7.2%.
The repo rate hike does not augur well for the real estate sector, especially the residential segment as it will result in increased mortgage rates. The transmission of change in repo rate is based on an individual bank’s decision. Since April 2022, RBI increased the repo rate by 140 bps, while home loan rates moved up by an average of 80 bps – more than 50% has been transmitted to date. Taking a cue from the previous transmission, we expect the home loan interest rates to go up in the range of 25-30 bps. However, the interest rate after this hike would be still below what the homebuyers had to pay 8 to 9 years back- more than 10%. It is likely that banks might also delay the transmission, taking into account higher housing demand during the festive season. Sales of residential units have increased by more than 2x during the first half of 2022 vis-à-vis the same period last year and the growth trajectory is maintained during the July-September quarter. With today’s hike in repo rate, the revised home loan EMI would increase by an average of 8-9% as compared to 6 months back. The continuous rise in home loan EMI is hence, expected to act as a sentiment disruptor. We believe that home loan interest rates inching towards 9% and above may result in moderation of housing sales growth in the medium term, especially post the current festive season.
Also Read: RBI Monetary Policy – Inevitable Hike Will Make Homes Costlier
