
RBI-MPC Meeting: Real Estate Sector Disappointed as RBI Keeps Repo Rate Steady
Mumbai, June 8, 2023 – The real estate sector in India expressed disappointment as the Reserve Bank of India (RBI) decided to keep the key policy rate steady at 6.5 percent for the second time. This move comes as a blow to the sector, which was hoping for a reduction in borrowing rates to boost demand and revive the industry.
Currently, home loan rates are already in the high single digits, and any further increase would push them into double digits, making it even more challenging for potential homebuyers to afford properties. The RBI’s decision to maintain the repo rate at its current level indicates that lending rates are unlikely to decrease in the near future, further dampening prospects for the real estate market.
The central bank has reiterated its focus on taming inflation, targeting a Consumer Price Index (CPI) of 4 percent. However, with inflation still hovering above 5 percent and uncertainties surrounding a normal monsoon and geopolitical tensions, the chances of a rate cut in the fiscal year 2024 seem slim.
The RBI has recently taken measures to address demand-led inflation concerns, including conducting variable repo rate auctions to absorb excess liquidity. Some leading banks had reduced lending rates following the RBI’s pause in its monetary policy committee (MPC) meeting held in April. However, the cumulative hike of 250 basis points since May 2022 has adversely affected demand sentiment in the real estate sector, leading to a decline in housing registrations in the top seven cities over the past several months.
The affordable housing segment has been hit the hardest by the rate hikes, followed by the middle-income segment, which heavily relies on home loans for purchasing properties. There is also concern that not all of the 250-basis point hike has been passed on to borrowers, leaving room for potential further increases in lending rates by banks.
Shishir Baijal, CMD of Knight Frank India, expressed caution about the industry, stating that while the decision to maintain the repo rate was welcome, the full transmission of rate hikes to lending rates is yet to be observed. The disappointment within the sector was reflected in the stock markets, with the Nifty Realty index being one of the biggest losers, and shares of most real estate developers closing lower.
Sandeep Runwal, President of the National Real Estate Development Council, Maharashtra, highlighted the need for a reduction in repo rates, as it would improve buyer sentiment and stimulate home sales. Raman Sastri, CMD of Sterling Developers, emphasized that another repo rate hike would have a detrimental impact on the real estate sector, as home loan interest rates are already at a high level. Further rate increases could push interest rates on home loans to an all-time high, severely affecting buyer sentiments and affordability.
The impact of higher interest rates extends beyond retail borrowers to real estate developers, who face increased finance costs and reduced profitability margins. To protect their margins, developers may have to raise home prices, further impacting affordability for potential buyers.
While the RBI Governor, Shaktikanta Das, stated that the central bank’s policy decisions are primarily driven by domestic conditions, he acknowledged that global developments are also being monitored. The revival in residential demand following the COVID-19 pandemic was partly attributed to the low-interest rate environment, which made homeownership more affordable. However, if high-interest rates persist, it could adversely affect buyer sentiment and impede the recovery of the real estate sector.
With Canada and Australia raising rates recently due to stubborn global inflationary trends, the RBI’s decision to maintain rates indicates its cautious approach in balancing domestic and global factors.
Mumbai, June 8, 2023 – The real estate sector in India expressed disappointment as the Reserve Bank of India (RBI) decided to keep the key policy rate steady at 6.5 percent for the second time. This move comes as a blow to the sector, which was hoping for a reduction in borrowing rates to boost demand and revive the industry.
Currently, home loan rates are already in the high single digits, and any further increase would push them into double digits, making it even more challenging for potential homebuyers to afford properties. The RBI’s decision to maintain the repo rate at its current level indicates that lending rates are unlikely to decrease in the near future, further dampening prospects for the real estate market.
The central bank has reiterated its focus on taming inflation, targeting a Consumer Price Index (CPI) of 4 percent. However, with inflation still hovering above 5 percent and uncertainties surrounding a normal monsoon and geopolitical tensions, the chances of a rate cut in the fiscal year 2024 seem slim.
The RBI has recently taken measures to address demand-led inflation concerns, including conducting variable repo rate auctions to absorb excess liquidity. Some leading banks had reduced lending rates following the RBI’s pause in its monetary policy committee (MPC) meeting held in April. However, the cumulative hike of 250 basis points since May 2022 has adversely affected demand sentiment in the real estate sector, leading to a decline in housing registrations in the top seven cities over the past several months.
The affordable housing segment has been hit the hardest by the rate hikes, followed by the middle-income segment, which heavily relies on home loans for purchasing properties. There is also concern that not all of the 250-basis point hike has been passed on to borrowers, leaving room for potential further increases in lending rates by banks.
Shishir Baijal, CMD of Knight Frank India, expressed caution about the industry, stating that while the decision to maintain the repo rate was welcome, the full transmission of rate hikes to lending rates is yet to be observed. The disappointment within the sector was reflected in the stock markets, with the Nifty Realty index being one of the biggest losers, and shares of most real estate developers closing lower.
Sandeep Runwal, President of the National Real Estate Development Council, Maharashtra, highlighted the need for a reduction in repo rates, as it would improve buyer sentiment and stimulate home sales. Raman Sastri, CMD of Sterling Developers, emphasized that another repo rate hike would have a detrimental impact on the real estate sector, as home loan interest rates are already at a high level. Further rate increases could push interest rates on home loans to an all-time high, severely affecting buyer sentiments and affordability.
The impact of higher interest rates extends beyond retail borrowers to real estate developers, who face increased finance costs and reduced profitability margins. To protect their margins, developers may have to raise home prices, further impacting affordability for potential buyers.
While the RBI Governor, Shaktikanta Das, stated that the central bank’s policy decisions are primarily driven by domestic conditions, he acknowledged that global developments are also being monitored. The revival in residential demand following the COVID-19 pandemic was partly attributed to the low-interest rate environment, which made homeownership more affordable. However, if high-interest rates persist, it could adversely affect buyer sentiment and impede the recovery of the real estate sector.
With Canada and Australia raising rates recently due to stubborn global inflationary trends, the RBI’s decision to maintain rates indicates its cautious approach in balancing domestic and global factors.