The real estate market can be volatile with fluctuating inflation. Inflation, the kernel of all higher interest rates, affects commercial banks as much as the real estate market. The country’s central bank introduces the repo rate to combat economic inflation. The repo rate is the rate of interest at which the central bank of any country lends monetary help to other commercial banks (or financial institutions). In India, the Reserve Bank of India (RBI) decides the repo rate, known as RBI Repo Rate, to meet the country’s rising inflation.
These RBI repo rates affect home buyers collaterally. At the time of investing in the housing market, home buyers will need to pay this added interest on the home loan. No wonder this skyrocketed home loan interest rates in January 2022, touching 9.5%. But don’t worry. RBI gave good news this April 2023 to support home buyers to get affordable housing. So, be comforted if you want to buy a house.
And coming to the good news
To everyone’s surprise, the Reserve Bank of India decided not to alter the current RBI Repo Rate, i.e., 6.50%, relieving home buyers from paying a taxing home loan interest rate. The Reserve Bank of India changed its RBI repo rate 6 times, complicating real estate market business transactions and causing much distress. To anyone taking the first step in this domain, you must understand why the RBI repo rate is important for the real estate market.
Why “RBI Repo Rate”?
The Indian economy has improved substantially since the COVID-19 outbreak, but have we achieved a complete recovery is the question of the moment. The pandemic affected all economic sectors, hindering the regular cash flow of the Indian market. It is RBI’s onus to implement a specific RBI repo rate to recover economic loss due to inflation at a given time. It maintains the cash flow but consequently increases the rate of interest in different sectors like the real estate market.
As I already mentioned, the Reserve Bank of India (RBI) increased its RBI repo rate 6 times consecutively, increasing by 250 basis points from 4% in January 2022 to 6.5%. Of course, RBI is taking necessary measures to ensure domestic economic recovery, but even with this intent, you can expect costlier home loans affecting the real estate market.
Let’s learn how the RBI repo rate affects the real estate market.
RBI Repo Rate and Real Estate Market
How are real estate markets volatile? How does the RBI repo rate affect the real estate market? What inflation has to do with the housing market? I will answer your questions.
The repo rate is one of the monetary policies of RBI. The RBI’s Monetary Policy Committee (MPC) modifies the policy rates according to the current situation. With inflation, the sale price in a housing market also sees a hike, demanding buyers to go for a home loan. These commercial banks then charge their customers an increased rate of interest on the home loan to satisfy RBI’s current interest rate.
The banks (or other financial institutions) borrow money from the RBI to provide a loan to home buyers. The banks pledge government securities or bonds as collateral through their legal agreements with the RBI. This short-term agreement allows the banks to provide monetary help to home buyers. And with their added interest rates on the home loan, they repay RBI their loan amount, repurchasing government securities or bonds from them. Hence, “repo” in RBI repo rate stands for repurchasing option.
Some testimonials
Read these testimonials to understand how RBI repo rates affect the real estate market.
“It is a big relief for home buyers like me. My home loan EMIs had increased from ₹80,000 to ₹1.02 lakh per month. When I availed of the home loan in 2017, the interest rate was 12%, then it dipped to 6 to 6.5%. Now again it is rising. I am trying to sell my flat, but with the rising interest rates, buyers seem to be delaying their decision to purchase.” said Praveen Bohra, a trader.
Praveen Bohra’s plight justifies RBI’s decision not to change the RBI repo rate.
Ashish Kukreja, Founder & CEO of Homesfy, said in his statement, “The real estate industry was concerned about the increasing repo rate, which had led to higher borrowing costs for individuals and businesses. Within the span of 6 months, the repo rate had increased from 4 to 6.5%, which is a substantial percent increase in a short span. These continued increases in the repo rate could have caused the interest rate on a home loan to exceed the psychologically acceptable threshold of 10%, which would significantly affect buyer perceptions of affordability.” he said.
“Thankfully there has been no alteration in the repo rate but the current situation is still serious, with its effects seen in budget segments leading to a drop in sales numbers in the lower ticket size. Also, the undeniable fact is that this whole aspect is not impacting the luxury segment. As we also provide home loan assistance, we have observed that out of 10 people, 3 to 4 of them go for loans. Nearly 70% of the higher ticket size do not opt for the loan. As of April 2023, the repo rate remains stable at 6.50%. So, will sales numbers will likely remain steady, and the real estate industry can continue to evolve positively. In conclusion, it is vital to remember that the market is known to bounce back, and this time will be no exception,” he said.
Wrapping it up
RBI repo rate is the control mechanism of the Reserve Bank of India to balance inflation with the country’s economy. RBI’s recent decision came as a respite for home buyers despite rising inflation. You must remember that it is a temporary decision, and we can expect lower RBI repo rates in the future. It will provide good impetus in housing market dealings and encourage more people to invest in a property. Overall, this decision will positively impact the real estate market