Real estate sector disappointed as RBI keeps repo rate steady

June 8, 2023

The Reserve Bank of India held the key policy rate steady at 6.5 per cent for the second time and while lending rates may remain stable, they will not be going down any time soon. This is not very good news for the rate-sensitive real estate sector.

What’s more, the RBI has made it very clear that it is focused on taming inflation — aligned to the CPI target of 4 per cent — and with inflation still above 5 per cent, uncertainties about a normal monsoon and the geo-political tensions persisting, all are pointers towards very chances of a rate cut in FY24.

The RBI’s worry with demand-led inflation was evident when it conducted a series of variable repo rate auctions with the intention of sucking out liquidity. In the wake of RBI’s ‘pause’ at the last MPC meeting in April, some leading banks had reduced lending rates.

Repeated hikes of 250 basis points cumulatively from May 2022 onwards have dented demand sentiment in the sector and housing registrations in the top seven cities have been showing a slide over the past several months.

The rise in rates has hit the affordable segment the hardest followed by the middle-income segment, which is the most reliant on home loans. There is the added concern that not all of the 250-bps hike has been passed on by the lenders and there is every likelihood that banks still have room for more hikes.

‘Cautious stance’

Knight Frank India’s CMD, Shishir Baijal voiced his concern on this saying that while the decision to keep the repo rate unchanged was welcome for the real estate sector, “we remain cautious about the industry as the complete transmission of the repo rate hikes to lending rates is yet to be observed.”

The unhappiness of the sector with the policy stance was reflected in the stock markets with the Nifty Realty index down over 1 per cent. The shares of most real estate developers were trading 0.6-2.3 per cent down in the afternoon trades. What the real estate sector is looking for is a reduction in borrowing rates.

Sandeep Runwal, President of National Real Estate Development Council, Maharashtra said that a reduction in repo rates, would “help improve home buyer sentiment and fuel home sales.” He added that it would put more money into the hands of consumers encouraging them to buy homes.

Raman Sastri, CMD, Sterling Developers said, “….another repo rate hike by the RBI would not augur well for the real estate sector as home loan interest rates are already at a higher level. Any further increase in policy rates means that interest rates on home loans may hit an all-time high and touch almost double-digit, which could have a substantial impact on buyer sentiments and affordability.”

Two-fold impact

Higher rates in the economy have a two-fold impact. While it makes home loans dearer for retail borrowers, it makes loans costly for real estate developers too, increasing their finance costs and affecting their profitability margins. To protect their margins they will have to increase home prices.

Both Canada and Australia have raised rates this week pointing to stubborn global inflationary trends.

While RBI governor Shaktikanta Das clarified that the Central Bank’s policy decisions are primarily driven by domestic conditions, he added a rider that it was keeping an eye on global developments too.

A key factor in the revival in residential demand just after the onset of the Covid-19 pandemic was the low-interest rate in the economy making home ownership affordable. While demand in the segment is still continuing, a persistent high-interest rate regime could have an adverse impact on buyer sentiment.

Leave a Comment