Rate hike or pause? Here’s how RBI’s monetary policy decision on June 8 may impact your home loan EMIs
RBI is set to declare its second bi-monthly monetary policy decision of FY24 on June 8th, with bets favouring a second pause in repo rate. Despite inflation staying below RBI's upper tolerance limit, the possibility of a rate hike is not ruled out.
Limelight is once again back at RBI who is set to declare the second bi-monthly monetary policy decision of FY24 on June 8th. The majority of bets are on a second pause in repo rate. However, despite inflation staying comfortably below RBI's upper tolerance limit, the chances of a rate hike are still not ruled out for this fiscal. Either way, a hike or a pause, RBI's repo rate action will have an impact on your home loan EMIs.
In the previous policy (April 2023), RBI kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50%. Subsequently, it also kept the standing deposit facility (SDF) rate unchanged at 6.25%, while the marginal standing facility (MSF) rate and the Bank Rate were also unchanged at 6.75%.
Prior to this, RBI has hiked the repo rate by 250 bps points since May last year, which had led to a significant jump in banks' lending and deposit rates. The reason behind this would be that rate hikes usually lead to a spike in the cost of funds for banks and hence the lenders pass on the impact to end borrowers.
RBI's 3-day monetary policy meeting has begun from Tuesday onward. On June 8, 2023, RBI is most likely to choose another pause.
Read here: RBI Policy: MPC to begin bi-monthly monetary policy meeting today; repo rate decision on June 8; Here's what to expect
Parag Sharma, Whole-time Director & Chief Financial Officer, of Shriram Finance said, "With the customer inflation level at 4.7%, well below RBI's upper tolerance limit of 6%, the conditions seem favourable for a pause in rate hikes. The latest GDP forecasts also point towards inflation becoming less of a concern."
Accordingly, Sharma added, "We expect that the MPC, in its upcoming meeting, will hit the pause button on the policy rate hikes, for the second time running. However, accurately forecasting the potential impact of El Nino on the economy has become the primary concern. Considering our economy's heavy dependence on farmers and small businesses, we feel that the Government would do well to take steps to mitigate the adverse effects of El Nino."
Also, according to a Refinitiv poll, all 64 economists expect no change to the 6.50% repo rate at the conclusion of the RBI's June 6-8 meeting.
Brokerage Reliance Securities also believes that RBI could keep rate unchanged at 6.5% on June 8 and the bank could wait to see the economic impact of a series of hikes over the past year.
Similarly, Shishir Baijal- Chairman and Managing Director, Knight Frank India said, "In its upcoming MPC meeting, we expect the RBI to keep the repo rate unchanged at 6.5%, continuing with a pause, as inflation, supported by statistical base has moderated, and will likely remain so. This provides enough support for the RBI to keep its key policy rate unchanged."
Read here: TCS to HCL Tech: Why you should buy IT stocks before RBI MPC meeting outcome
In April 2023, CPI inflation eased to 4.7% which is the second consecutive month where this economic indicator has stayed below RBI's upper tolerance limit of 6%. Inflation has been above RBI's upper tolerance target from January 2022 until March 2023 where the retail inflation experienced a decline to its lowest point in the past 15 months.
But not everything is merrier. Baijal also explained that inflation in other components, such as core inflation, which accounts for price pressures in households’ products, has remained elevated albeit with a slight moderation in April 2023. High core inflation affects the discretionary spending of the households, which in turn leads to moderation in the overall consumption demand.
This has already been witnessed in FY 2023 GDP growth. Although the overall economy grew by 7.2%, the share of private consumption to GDP moderated to 60.6% in FY 2023 from 61.1% in FY 2022.
Thus, Baijal added, "potential impact of the persistent price pressures on the domestic consumption growth will likely keep the RBI cautious enough to continue with a repo rate hike."
Read here: Buy vs rent: HDFC CEO confident on India's growing real estate demand in coming years. Here's why
Pause or rate hike, how will they impact home loan EMIs?
As per Ramani Sastri, Chairman and MD, Sterling Developers., while the RBI's decision to keep the repo rate unchanged will unlikely have an immediate impact on homebuyers, it does offer some stability to the real estate sector. Hence, in such a context, another repo rate hike by the RBI will not augur well for the real estate sector as home loan interest rates are already at a higher level.
Sastri further explained that 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, which in turn can curtail demand. Another hike will lead to even higher borrowing costs for developers too. Hence, we expect a continuation of existing policy rates through 2023 and undoubtedly, a further reduction in interest rates in the near future would be preferred to bolster overall market confidence and make it more enticing for home buyers.
Lastly, Knight Frank's MD said, the implication of the rate hike on home loan demand has been minimal so far. Residential demand has remained upbeat indicating a strong consumer preference towards home ownership despite high interest rate and inflation over the last one year. However, with economic growth facing headwinds from the global slowdown, and the full impact of the high-interest rates yet to be seen, we remain cautious of the impact on housing market.
Since the previous status quo in policy repo rate, there has been a mixed trend in lending rates.
Data from RBI revealed that the weighted average lending rate (WALR) on fresh rupee loans of SCBs decreased by 23 basis points (bps) from 9.32 percent in March 2023 to 9.09 percent in April 2023.
Furthermore, the WALR on outstanding rupee loans of SCBs increased by 4 bps from 9.72% in March 2023 to 9.76% in April 2023. Meanwhile, the 1-Year median Marginal Cost of Fund based Lending Rate (MCLR) of SCBs remained unchanged at 8.60% in May 2023.
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First Published:6 Jun 2023, 10:00 PM IST
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