Real estate developers body Confederation of Real Estate Developers' Association of India (CREDAI), on March 30, urged the Reserve Bank of India (RBI) to hit the pause button on interest rate increases in the upcoming meeting of its Monetary Policy Committee (MPC), citing the potential impact on home sales.
The plea by the CREDAI came after the MPC raised the key repo rate, at which RBI lends short-term funds to commercial banks, to 6.5 percent from 4 percent since May 2022 to combat accelerating inflation.
The increase, passed on to consumers by banks, has meant higher home loan rates and equated monthly instalments for homebuyers.
RBI is scheduled to announce its first monetary of the new financial year on April 6.
Also read: RBI may deliver 25 bps rate hike in April policy, may pause in further policies, say economists
In a statement, CREDAI cited financial challenges faced by developers as a consequence of the rate hikes, saying realtors had absorbed the impact of burgeoning costs.
Another hike in the repo rate would lead to even higher borrowing costs for developers, it said, ultimately leading to steeper project costs and housing prices; in the past year, prices have already increased by 5-6 percent. Coupled with rising raw material costs, it would reduce the wafer-thin margins that developers earn, making some projects financially unviable.
Double-digit home loan rates?
The direct correlation between the repo rate and the country’s Gross Domestic Product (GDP) growth, pointing to the period from March 2021 to March 2022, where the repo rate was hovering around 4-4.4 percent, leading to one of the strongest eras in the Indian economy, with a growth rate of 8.95 percent, CREDAI said in the statement.
Rating agency ICRA, in a recent report, said the anticipated 25 basis points hike in April 2023 would take the repo rate to 6.75 percent, which is more than 100 bps higher than the MPC’s consumer price inflation forecast for H2FY2024, and may be adequate. One basis point is one-hundredth of a percentage point.
Also read: RBI policy rate hike on ‘expected’ lines; to impact affordable housing demand
In its statement, CREDAI said homebuyers, too, will face higher, almost double-digit home loan rates with a potential rate hike, which could deter them from purchasing a property, especially in Tier One cities. This could lead to a slowdown in the real estate market, reversing a property market uptrend in the post-Covid era.
“In the last one year, the cost of construction has risen rapidly due to the gradual increase in repo rates by the RBI, which has adversely impacted many developers as they struggle to cope up financially. Another repo rate hike would not only make certain projects financially unfeasible, but it would also deter homebuyers as home loan rates will be at an all-time high,” said CREDAI President Harsh Vardhan Patodia said.
“Acknowledging the support RBI has lent to the industry in the past, especially during peak Covid, CREDAI has backed the need for a lower repo rate by stressing the strong GDP growth numbers that India could achieve during 2021- 2022, ultimately enabling a win-win situation for all stakeholders involved,” Patodia added.
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