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Rising interest rates may impact home-buying sentiment, say experts

The upward revision in credit limit for homebuyers through cooperative banks will provide increased credit access, say experts, who also hailed the move allowing rural and district cooperative banks to lend to realtors

Shaktikanta Das (FIle image)

Shaktikanta Das (FIle image)

The Reserve Bank of India’s decision to raise the repo rate by 50 basis points on June 8 was expected, while its announcement on cooperative banks will impact homebuyers as well as developers, real estate experts have said.

The RBI on June 8 raised the repo rate to a two-year high of 4.9 percent in an attempt to tame inflation. Sharing the outcome of the monetary policy committee, RBI governor Shaktikanta Das also said the limits for individual housing loans extended by urban and rural cooperative banks was being revised upwards by more than 100 percent.

“Considering the growing need for affordable housing and to realise their potential in providing credit facilities to the housing sector, it has been decided to allow StCBs (state co-operative banks) and DCCBs (district central co-operative banks) to extend finance to Commercial Real Estate–Residential Housing (CRE-RH) within the existing aggregate housing finance limit of 5 percent of their total assets,” Das said.

Also read: RBI raises repo rate by 50bps to 4.9% to fight inflation pressure

Rural Co-operative Banks (RCBs) have also been permitted to lend to CRE-RH sector. The present guidelines prohibit StCBs and DCCBs from extending loans to the commercial real estate sector.


“The 100 percent upward revision in credit limit for individual homebuyers through cooperative banks will provide increased credit access to homebuyers in suburban areas as well as tier-2/3 cities,” said Samantak Das, chief economist, and head of research and REIS, India, JLL.

Allowing rural and district cooperative banks to lend to housing developers would support developers of affordable housing projects who have struggled for finance, especially for projects in the peripheral and smaller urban centres, Das said.

Also read: MPC meeting: Key highlights from RBI Governor Shaktikanta Das' speech

The rise in policy rate would act more as a “sentiment disruptor for the homebuyers, given that mortgage rates were likely to inch up, he said.

However, the impact of the rate hike on home loan EMIs was unlikely to be significant as these were for a longer tenure. Banks and housing finance companies only partially transmitted the previous policy rate hike and also, interest rates were still likely to remain at decadal lows.

“While the opportunity for homebuyers is reducing, it is critical to understand that affordability remains high and buying momentum is expected to remain largely intact,” he said.

Ramesh Nair, CEO, India and MD, Market Development, Asia, Colliers, said that RBI’s decision would go a long way in financial inclusion and would also open a huge financing window in tier II and III cities.

Cooperative banks can now lend funds to developers for housing projects. This is expected to provide a major fillip to affordable housing projects and tap the strong latent demand, he said.

Also read: Bond market shows faith and fortitude after RBI hikes repo rate by 50 bps

Some real estate experts, however, warned that the sector may now be entering the “red zone” and the rate hike will push up home loan interest rates.

“A hike was inevitable but we are now entering the red zone. Any future hikes will reflect markedly on housing sales,” said Anuj Puri, Chairman, Anarock.

The hike would reflect in residential sales volumes in the months to come, more so in the affordable and mid-segments, he said.

“The silver lining is that the Indian housing market is still largely end-user driven, so there is no investor mindset seeking the lowest possible entry point. Genuine demand comes from an underlying aspiration for homeownership,” he said.

Also read: Real estate stocks surge on RBI measures to improve credit to sector

On the move to permit rural cooperative banks to extend finance, he said that it may not result in a sudden spurt in borrowing by developers. Funding was already available for good and viable projects.

“One major advantage of this move is that it opens up an additional avenue for developers to access funding for their projects. That said, the basic criteria for lending will continue—the viability of the project, developer’s track record, etc, Puri said.

Shishir Baijal, chairman and managing director, Knight Frank India, said home loans were set to get costlier. Banks had already raised the interest rate on home loans by 30-40bps since the May rate hike.

Rising interest rates along with elevated construction cost and product price pressures could adversely impact buyer sentiment.

The increased cost of borrowing would also make the construction of housing projects costlier for developers, ultimately putting price pressure on the end-user, he said.

However, the RBI announcement to increase the limit for individual housing loans by cooperative banks would cushion some of the impact of the rate hike. “Credit flow to the housing sector is also likely to improve with rural cooperative banks starting to finance residential projects,” said Dhruv Agarwala, Group CEO,, &

Also read: RBI on way to catching up with reality, globally rate hikes will be an overhang on asset prices: Devina Mehra

Builders agree

The current round of hikes could make the buyers apprehensive and they could adopt a wait-and-watch attitude, said Lincoln Bennet Rodrigues, Chairman & founder, The Bennet and Bernard Company

The cumulative increase of 90 basis points would increase the mortgage payments for home buyers, however, given the fact that the overall increase in cost of homes over the past 5 years has been negligible, this increase in interest rates can be absorbed by borrowers looking to buy homes, Rohit Gera, Managing Director, Gera Developments, said.

“The increase will affect the cost of borrowings for developers already reeling under severe margin pressure on account of inflation in input costs,” he said.

Also read: RBI Monetary Policy | Borrowers to see a steep hike in EMIs, interest burdens

Demand blip only for the short term

With mortgage loan rates set to go up, a slight dip in demand in the short term was likely but the overall outlook on the sector remains strongly bullish in the long term, said Sharad Mittal, Director and CEO, Motilal Oswal Real Estate Funds.

“In an interesting move, RBI has now allowed rural co-operative banks to lend towards residential housing projects. This will help improve much-needed liquidity in the sector,” said Sharad Mittal, Director and CEO, Motilal Oswal Real Estate Funds.
Vandana Ramnani
first published: Jun 8, 2022 12:34 pm
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