6th straight RBI rate hike set to make home loans costlier

MUMBAI/NEW DELHI: Home loans and other borrowings will get more expensive, with the RBI raising its key policy rate by 25 basis points on Wednesday. The sixth consecutive rise since the RBI started hiking rates in May 2022 has resulted in a 250-basis-point increase in interest rates.
The monetary policy committee voted 4:6 in favour of increasing the repo rate — the rate at which the RBI lends to banks — to 6.5% from 6.25% earlier. The rate hike will immediately impact individual borrowers and small businesses as most retail loans are linked to the repo and get re-priced immediately. Announcing the MPC decision, RBI governor Shaktikanta Das said inflation was moderating, and “the worst is behind us”. “The stickiness of core or underlying inflation is a matter of concern. We need to see a decisive moderation. We have to remain unwavering in our commitment to bring down inflation,” he said.

The hike is good news for depositors as the increase in lending rates would mean that the banks will have more headroom to offer higher returns without sacrificing their margins. Das said the rate hike has resulted in the real policy rate (rate adjusted for inflation) moving into positive territory.
Many analysts expected the governor to do a policy pivot and hint at pausing rate hikes. However, there was no such reassurance, and Das said it was impossible to give forward guidance.
While some new borrowers with a high credit score can borrow at 8.5% thanks to the competition for home loans, the older borrowers who took loans at 6.5% earlier this fiscal will see their borrowing cost rise to 9%. Das said that economic activity remains resilient and urban activity is firming up, especially in services — travel, tourism and hospitality with domestic air passenger traffic crossing pre-pandemic level. “Several high-frequency indicators also point toward the strengthening of activity. “Investment activity continues to gain traction. The total flow of resources to the corporate sector increased to over Rs 20.2 lakh crore as against Rs 12.2 lakh crore a year ago,” said Das.
While the governor remained cautious about inflation, he said he was optimistic about the economy. “Available data for Q3 and Q4 2022-23 indicates that economic activity in India remains resilient. Urban consumption demand has been firming up, driven by a sustained recovery in discretionary spending, especially on services such as travel, tourism and hospitality,” said Das.
Real estate experts said that the policy might temper demand for housing. “With the appreciation in real estate prices in the last couple of quarters, any increase in the interest rates, which had already breached the 9.5% mark, would put pressure on sales volumes in the affordable and lower mid-range housing segments, which are more cost-conscious,” said Anuj Puri, chairman of Anarock Group.
Shishir Baijal, chairman & managing director, Knight Frank India, said that so far the impact of the interest rate hike on the housing sector has been limited. The Knight Frank affordability index has deteriorated marginally by an average of 1.4% over the last year. Demand for home loans has remained strong during the last year, as seen in 16% growth in December 2022. “We hope that this rate hike will not adversely impact consumer sentiments towards home purchases in the coming financial year,” Baijal said.