The Reserve Bank of India (RBI) has decided to keep the key repo rate unchanged at 6.5% during its latest monetary policy review on Friday, marking the 11th consecutive time the rate has remained steady. This decision is significant as it comes amid an ongoing period of economic uncertainty and volatility, particularly in the face of inflationary pressures and slowing GDP growth. The RBI's decision has crucial implications for various sectors of the economy, notably the housing market, where home loan borrowers were hoping for some relief. However, the status quo on the repo rate means that borrowers will continue to face the same monthly financial commitments, with their equated monthly instalments (EMIs) remaining unchanged for the time being.
RBI Governor Shaktikanta Das underscored the central bank's focus on maintaining economic stability in his address following the policy review. He emphasized that the Monetary Policy Committee (MPC) remains committed to restoring the balance between inflation and growth, stating, “MPC believes that only with durable price stability can we secure a strong foundation for high growth. MPC is committed to restoring inflation-growth balance in the interest of the economy.” This reflects the RBI's overarching goal of maintaining a stable economic environment by controlling inflation, while ensuring that growth does not stall.
For home loan borrowers, the unchanged repo rate brings a sense of financial continuity, but unfortunately, no immediate relief. The repo rate is one of the key tools that the RBI uses to influence lending rates across the economy. Since October 2019, Indian banks have linked floating-rate retail loans, including home loans, to external benchmarks such as the repo rate. This linkage ensures that any change in the repo rate is reflected in the interest rates charged on these loans. A rate cut would typically lower borrowing costs and make home loans more affordable, providing relief to borrowers struggling with high EMIs. However, with the repo rate holding steady, this relief is not forthcoming, and borrowers will continue to face the same financial burden in the short term.
The RBI's decision comes at a time when India's real GDP growth has slowed to a seven-quarter low of 5.4% for the July-September 2024 period. This deceleration in economic growth has sparked concerns among economists and policymakers, who worry that the country may be facing a prolonged period of sluggish growth. The RBI is keenly aware of these concerns, and its decision to keep the repo rate unchanged is largely aimed at controlling inflation, which has been rising sharply. Retail inflation surged to 6.2% in October 2024, driven primarily by higher food prices. In response to these inflationary pressures, the RBI has reaffirmed its target of reducing inflation to 4%, which it views as essential for long-term economic stability.
Alongside the decision on the repo rate, the RBI has also announced a phased reduction in the cash reserve ratio (CRR) to 4% by December 2024. This move is expected to inject Rs 1.16 lakh crore into the banking system, which will enhance liquidity and support the financing needs of various sectors, including developers. However, while this move is welcomed by some, industry experts believe that a reduction in the repo rate would have provided a more direct stimulus to the economy, particularly in sectors such as housing and consumer spending. The CRR cut improves liquidity but does not directly impact the cost of borrowing, which remains a key factor for businesses and consumers alike.
The real estate sector, particularly affordable housing, has expressed concern over the RBI's decision. Dr. Niranjan Hiranandani, Chairman of the National Real Estate Development Council (NAREDCO), pointed out that lower interest rates would have made home loans more affordable, thereby stimulating demand in the real estate market. He explained, “Lower interest rates would have made home loans more affordable, boosting demand in the real estate sector, particularly in affordable housing. While the Indian real estate sector is experiencing strong momentum, the absence of a rate cut threatens affordable housing growth.” Dr. Hiranandani also stressed that strategic adjustments in interest rates are necessary to ensure sustained growth in the real estate sector, which is a major contributor to the country’s GDP.
Samir Jasuja, Founder and CEO of PropEquity, echoed these concerns, suggesting that fiscal and monetary reforms are essential to unlock the full potential of the real estate sector. He emphasized that the key to achieving a $1 trillion real estate economy is making home loans more accessible and affordable. “To achieve a $1 trillion real estate economy, home loans must be made accessible and affordable. While the CRR cut announced by the RBI will improve liquidity and help developers borrow more, a repo rate cut would have boosted housing demand,” Jasuja said. He further noted that an affordable home loan ecosystem could stimulate growth in various segments of the real estate sector, including both luxury and affordable housing.
On the other hand, Manik Malik, CFO of BPTP, offered a more balanced view, acknowledging that the stability of interest rates can be beneficial for the real estate sector. Malik highlighted that stable rates provide predictability for home loan borrowers, which can enhance affordability and customer confidence. “Stable rates keep home loan interest rates steady, ensuring affordability for buyers and sustaining consistent demand across housing segments. This builds customer confidence and supports the real estate sector’s long-term growth,” he said.
In conclusion, while the RBI's decision to hold the repo rate steady provides a sense of continuity and stability in the economy, it also brings challenges, particularly for the real estate sector and home loan borrowers. The central bank's priority on controlling inflation and ensuring economic stability has led to this cautious stance, but many within the real estate industry argue that targeted interest rate cuts would have provided a more direct boost to housing demand, especially in the affordable housing segment. As the economy navigates through these challenging times, the real estate sector and other industries will continue to call for more proactive monetary and fiscal measures to unlock growth and ensure long-term economic prosperity.
