In a bid to contain inflation, the Reserve Bank of India on May 4 increased the benchmark lending rate by 40 basis points (bps) to 4.40 percent for the first time in two years. This, say real estate experts, is not welcome as the repo rate hike coupled with cost-push inflation in construction is likely to slow down the growth trajectory of the residential sector, which does not augur well for the Indian real estate sector.
The decision follows an unscheduled meeting of the Monetary Policy Committee (MPC), with all six members unanimously voting for a rate hike while maintaining the accommodative stance. The surprise move came ahead of an expected rate hike from the US Federal Reserve and against the backdrop of retail inflation persistently staying above the central bank’s comfort zone.
Experts said that this dynamic response has been to ensure that inflation is brought under control and does not impact the broad-based recovery of the Indian economy that has been witnessed recently.
"From a real estate point of view, this hike in policy rate is not welcome and will have a negative impact as home loan rates will increase immediately. After a hiatus of five years, we have observed a robust comeback in residential sales and launches in the last couple of quarters due to ‘affordability synergy’. However, this repo rate hike coupled with cost-push inflation in construction is likely to slow down the growth trajectory of the residential sector, which does not augur well for the Indian real estate sector,” said Samantak Das, Chief Economist, and Head, Research and REIS, India, JLL.
Unfortunately, for home buyers, this hike signals an imminent end to the all-time low-interest regime, which has been one of the major drivers behind home sales across the country since the pandemic began, said Anuj Puri, chairman, ANAROCK Group.
Moreover, rising interest rates and inflationary trends in basic raw materials in construction including cement, steel, labour cost etc. will add to the burden of the residential sector, which did significantly well in the previous quarter – Q1 2022.
This rise in interest rates will ultimately impact overall acquisition cost for homebuyers - and may dampen residential sales to some extent. The possibility of overall price hike was also highlighted in ANAROCK’s recent consumer survey wherein at least 56 percent of the respondents felt that property prices will increase in 2022, he added.
A deep dive revealed that a price rise of less than 10 percent will have a ‘high impact’ on residential sales and above 10 percent rise will have a ‘moderate-to-low impact’ on sales. The current sales velocity will thus be impacted by rise of less than 10 percent in overall acquisition costs, he said.
"An increase in repo rate has been expected on the back of very high inflation. Rising interest rates along with rising prices of homes on account of high inflation will have a significant negative impact on the real estate sector as both impact affordability significantly,” said Rohit Gera, managing director, Gera Developments.
Others, however, were of the opinion that there may not be an immediate increase in home loan rates by commercial banks.
Niranjan Hiranandani, vice chairman, NAREDCO, described the move as a short-term reaction to crude prices and impact of inflation on commodities. From a real estate perspective, he hoped the hike in repo rates "will not impact home loan interest rates; and that the regulator will ensure that inflationary pressure on the individual does not get exacerbated by hiked rates of home loans."
The RBI move comes against the backdrop of India’s inflation rates soaring to new highs, with retail inflation in March being at a 17-month high. “Inflation rates in India have been beyond the RBI’s upper band of tolerance, which is 6 percent, and the rationale of the move makes sense – the hope being that home loans would not get impacted,” he said.
From a real estate perspective, "we don’t expect an immediate increase in home loan rates by commercial banks. This makes it a good time for homebuyers who were on the fence about buying their dream home. With home prices expected to rise in certain segments, it is an opportune time for homebuyers to take advantage of the current low home loan rates and largely stable prices before banks reset interest rates," said Ramesh Nair, CEO, India and Managing Director, Market Development, Asia at Colliers.