RBI’s Fourth Consecutive Repo Rate Increase

Implications of efforts to rein in inflation, maintain global interest rate parity and ensure the stability of the currency

The COVID-19 pandemic may still be a part of our lives, but the special consideration it provided is definitely a thing of the past. While the “new normal” initially witnessed several adjustments and relaxations, companies across the globe are insisting that their workforce starts attending the office as much as required, ranging from a hybrid model to the entire work week.

The same scenario is being witnessed when it comes to funding a new residence. The Reserve Bank of India (RBI) Monetary Policy Committee (MPC) announced the first post-pandemic repo rate hike in May 2022, followed by June, then in August and, recently, at September-end.

Explaining the implications, Dr. Samantak Das, chief economist and head of Research and Real Estate Intelligence Service (REIS), JLL, India, said the RBI’s decision to increase the repo rate by 50 basis points (bps) for the fourth consecutive time to 5.90% is along the expected lines, as the Central Bank aims to rein in inflation, maintain global interest rate parity and ensure the stability of the currency. He pointed out:

“Retail inflation has been hovering above RBI’s upper target of 6% since February 2022, with the recent August number at 7%. The rate hike is intended to arrest the persistent rise in inflation, which is impacting economic growth. The Fed interest rate hike and its outlook have also prompted RBI to take this step. The GDP outlook has been marginally lowered to 7.0% for the financial year 2022-23 from an earlier forecast of 7.2%.” 

According to Das, the repo rate hike does not augur well for the real estate sector, especially the residential segment, as it will result in increased mortgage rates. The transmission of change in repo rate is based on an individual bank’s decision. He said:

“Since April 2022, RBI increased the repo rate by 140 bps, while home loan rates moved up by an average of 80 bps — more than 50% has been transmitted to date. Taking a cue from the previous transmission, we expect the home loan interest rates to go up in the range of 25-30 bps. However, the interest rate after this hike would still be below what homebuyers had to pay eight to nine years back — more than 10%. It is likely that banks might also delay the transmission, taking into account higher housing demand during the festive season.

“Sales of residential units have increased by more than 2x during the first half of 2022, vis-à-vis the same period last year, and the growth trajectory was maintained during the July-September quarter. With today’s hike in repo rate, the revised home loan EMI (equated monthly installment) would increase by an average of 8-9% as compared to six months back. The continuous rise in home loan EMI is, hence, expected to act as a sentiment disruptor. We believe that home loan interest rates inching towards 9% and above may result in moderation of housing sales growth in the medium term, especially post the current festive season.”

Anurag Mathur, CEO, Savills India, concurred, stating that with the 50-bps increase, the benchmark lending rate in the country has reached 5.90%, significantly higher than the 5.15% in pre-pandemic times. The RBI has been cognizant of global headwinds, including heightened inflation and revised FY23 GDP growth rate downwards by 20 bps to 7.0%. Although inflation projection for the current fiscal year has been retained at 6.7%, it remains beyond the tolerance zone. He said:

“Moreover, with central banks of major economies upping the ante in the fight against inflation, RBI’s continued withdrawal of accommodation could mean a steady upward trajectory of domestic lending rates in the near term. Rising interest rates are likely to translate into higher equated installments and put more pressure on the final demographic unit at the household level. RBI’s steely resolve to restore price stability is likely to result in temporary pain-points across economic sectors, especially automotives and residential real estate, where mortgage-based end user purchase is highly prevalent.”

On the brighter side for the real estate sector, Mathur underlined that office markets have signaled the beginning of a growth stage. This year is likely to witness 55-60 million ft² of leasing activity in the country. Mathur added:

“The warehousing and logistics sector stands to benefit from the recently launched National Logistics Policy, which aims to streamline shipping and lower logistics costs throughout the country. Meanwhile, REITs (real estate investment trusts) in the country have received a further boost, with SEBI (Securities and Exchange Board of India) allowing them to raise funds through short-term commercial papers.”

Manju Yagnik, vice chairperson, Nahar Group, and senior vice president NAREDCO, Maharashtra, also emphasized that the hike of 50 bps from the RBI was on the expected lines as it is extremely essential for India to control rising inflation numbers. She said:

“Rising inflation is an international phenomenon as even the U.S. Federal Reserve hiked the interest rates by 75 bps. Indian real estate consumers, however, had already factored in this hike, as was evident in the unprecedented registration numbers registered in the past two months. With real estate valuations expected to appreciate in the long term, this upcoming festive season should witness a massive uptick in demand as consumers would throng back to the market to take advantage of the multiple new projects and new offers.”

On the brighter side for the real estate sector, Mathur underlined that office markets have signaled the beginning of a growth stage. This year is likely to witness 55-60 million ft2 of leasing activity in the country.

Going forward, much will depend on the extent to which the lending commercial banks continue to pass on these rate hikes to home loan seekers. This is expected to gradually influence sentiments in the residential market, an important real estate segment and key demand driver for the vertical-transportation sector.