RBI monetary policy: Why borrowers may continue facing high home loan rates

The Reserve Bank of India (RBI) kept its key interest rate unchanged on Friday in a widely expected move as robust economic growth continues to provide space to focus on bringing down inflation towards its medium-term target of 4 per cent. As a result, there will be no immediate relief for real estate or home loan installments. With the repo rate unchanged for the eighth consecutive time, banks are unlikely to adjust their lending rates soon, meaning your EMI will stay the same for now.

RBI Policy: Impact on Home Loans

"Borrowers may face continued high interest rates on loans. Since the repo rate directly influences lending rates, an unchanged rate means existing loans remain benchmarked to an elevated repo rate of 6.5 per cent, with the possibility of new loans being offered with lower spreads than older loans. Any future rate cut would lead to lower rates, hence lowering the EMIs that loan borrowers have to pay," said Adhil Shetty, chief executive officer of Bankbazaar.com.

The repo rate plays a crucial role in determining home loan interest rates. Interest rate fluctuations can impact real estate demand. Lower interest rates usually boost demand by making borrowing more affordable, which can drive up property prices. Conversely, higher interest rates may reduce demand and property prices to soften.

What should borrowers do now?

Stability in the repo rate means mortgage rates are likely to remain steady, offering predictability for your financial planning. "This is an opportune time to review your budget and get pre-approved for a mortgage, ensuring you are ready to act quickly when you find the right property," suggests Manju Yagnik, Vice Chairperson of Nahar Group and Senior Vice President of NAREDCO- Maharashtra. "Consulting with a mortgage advisor can help you explore the best loan options available," she adds.

"For prospective homebuyers, this is a favourable moment to assess their financial readiness and lock in current interest rates before any potential future hikes. However, buyers must consider their overall financial health, including job stability, existing debts, and emergency savings," says Atul Monga, CEO and Co-Founder of Basic Home Loan.

RBI Policy: Impact on Real Estate

Anuj Puri, chairman of ANAROCK Group, said that the RBI’s decision to keep the repo rate unchanged will help the Indian real estate sector. "With unchanged borrowing costs, both developers and homebuyers benefit from increased market confidence and predictability," he said.

The mid-range and premium property segments account for more than 55 per cent of the current supply. Together, they recorded approximately 76,555 units sold in Q1 2024, nearly 60 per cent of total sales. "Buyers in this segment are sensitive to volatile interest rates, and upward hikes would cause many of them to defer home purchases. This policy continuity supports sustained demand in these two segments," said Anuj.

"The affordable housing sector is, of course, most cost-sensitive. While PMAY Urban has sanctioned 11.864 million homes against a demand of 11.224 million homes, affordable housing (homes priced under Rs 40 lakh) sales in Q1 2024 recorded 26,545 units - a mere 20% of total sales," he said, referring to the Pradhan Mantri Awas Yojana.