As India’s GDP is poised for its slowest growth in more than a decade, the Reserve Bank of India (RBI) is revising its monetary policy to stimulate growth.
Earlier this month, in a bid to boost growth and ease liquidity, the RBI lowered the short-term lending rate by 25 basis points, bringing down the benchmark rate from 7.5 to 7.25 per cent. This was the second reduction in the repo rate in as many months. While the rate cut may not have been passed on to customers immediately, the easing liquidity and the financial environment indicate that it’s just a matter of time before home loan rates go south.
The RBI has already cut rates three times this year and another round of cuts — which is widely expected — will pave the way for lower interest rates for individual clients. The revision in the rates will positively impact the sentiment in the real estate market. “Banks will now be able to offer loans at more attractive rates. Cheaper loans for home buyers will prompt renewed interest in residential property purchases,” says Shobhit Agarwal, Managing Director — Capital Markets, Jones Lang LaSalle India.
Positive move
He adds that banks may revise the base rate, which would also benefit old home loan borrowers who are paying higher rates than new borrowers would.
Agarwal says the RBI’s move indicates a positive direction for the economy in general and therefore also for the real estate sector. “The cost of funding for real estate developers should also reduce marginally. Any kind of relief to developers will eventually translate into better offers for buyers.”
He adds that a softer rate regime will mean double benefit for home buyers — lower interest rates on loans and a more rational price from developers.
The rate cuts over the past few months may just be the beginning of a downward spiral in interest rates. Where containing the galloping inflation and tightening spending were the biggest challenge for the government over the past couple of years, the priority now is to ease the liquidity crunch and steer clear of a full-blown recession.
“A drop in housing loan rates will stimulate demand for real estate in the country and we look forward to more demand-stimulating measures,” says Pankaj Bansal, Director of Delhi-based M3M Developers.
The RBI is expected to announce further cuts in the weeks and months to come. The current interest rate of most lenders is around 10.5 per cent and it could take just two rate cuts for it to return to the sub-10 per cent mark.
With the inflation rate falling to three-year lows, a fresh round of rate cuts will encourage even banks and private financial institutions such as HDFC and ICICI to further cut their rates. “The recessionary factors could well mean an opportunity in adversity for potential home buyers,” says chartered accountant Anantram Rao.
He adds that even a 0.5 per cent rate cut translates into savings of Rs50 (Dh3.35) per month for every Rs100,000. “Over the 20-year period of the loan, it adds up to a benefit of more than Rs120,000 on a loan of Rs1 million.”
Reviving the sector
Existing variable home loan clients were the worst affected by the continuous rate hikes over the past three years. Says Paras Gundecha, President, Maharashtra Chamber of Housing Industry: “The drop in rates will be good news for the majority of the home loan borrowers, particularly for those who were unable to service the rising monthly instalments and whose monthly budgets went haywire even as the variable interest rate increased by more than 50 per cent — from just 7.5 per cent to 11.5 per cent.”
He adds that the reduction in rates will help boost home-buyer sentiment and ultimately revive the sagging real estate market in the country. “The central bank must also take urgent steps to bring down the high cost of funding, which is hurting the developer community,” says Gundecha.
