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RBI policy: How a 50 bps rate hike will impact homebuyers, home loan EMIs

ICICI Bank and Punjab National Bank (PNB) are the first to hike their benchmark lending rate right after RBI increased the repo rate by another 50 basis pointsPremium
ICICI Bank and Punjab National Bank (PNB) are the first to hike their benchmark lending rate right after RBI increased the repo rate by another 50 basis points

  • In August policy, RBI hiked the repo rate by 50 basis points - taking the rate to 5.40%. Also, the standing deposit facility (SDF) rate is at 5.15% and marginal standing facility (MSF) rate, and the Bank Rate are at 5.65%.

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ICICI Bank and Punjab National Bank (PNB) are the first to hike their benchmark lending rate right after RBI increased the repo rate by another 50 basis points on Friday. This also marks the beginning of costlier EMIs for new and existing borrowers on their home loans. Other banks are expected to follow suit. Generally, in a rate hike scenario, borrowing funds becomes expensive for banks from RBI. This leads to a rise in the cost of funds which makes banks to pass on the impact to borrowers' lending rates. So far, RBI has increased the repo rate by 140 basis points in three policies which also made a significant upward shift in term loan rates. However, the latest hike in repo rate is expected to dampen homebuyers' sentiment as home loan EMIs are seen to get costlier making a dent in their pockets.

In August policy, RBI hiked the repo rate by 50 basis points - taking the rate to 5.40%. Also, the standing deposit facility (SDF) rate is at 5.15% and marginal standing facility (MSF) rate, and the Bank Rate are at 5.65%.

Additionally, the MPC decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.

RBI's main focus on hiking the interest rate is to tame the mounted inflation which stays above its comfort limit of 6% for the sixth consecutive month. Although, the latest rate hike was higher than expected.

After RBI's policy, ICICI Bank announced on its website, "ICICI Bank External Benchmark Lending Rate" (I-EBLR) is referenced to RBI Policy Repo Rate with a mark-up over Repo Rate. I-EBLR is 9.10% p.a.p.m. effective August 5, 2022."

Further, PNB also made a 50 basis hike in its benchmark lending rate. In its regulatory filing, the bank said, that upon an increase in Repo Rate by RBI, the Repo Linked Lending Rate (RLLR) has been revised from 7.40% to 7.90% with effect from August 6.

The above hike in benchmark lending rates means that term loans that are linked to RLLR will also see an upward shift in their interest rates.

With that, the equated monthly installment (EMIs) on home loans will get expensive for borrowers.

Talking about home buyers' sentiment, Surendra Hiranandani, Chairman, and Managing Director, House of Hiranandani said, "This year, repo rates have been gradually climbing to maintain momentum in the fight against inflation. The MPC raised repo rates by 50 basis points in June of this year. And, once again, the MPC's decision to boost repo rates again by 50 points indicates that inflation is here to stay for some time. The increase in repo rates will have an effect on interest rates as well as homebuyer attitude. This year has seen a steady increase in home sales, but the ongoing climb in mortgage rates may overwhelm a buyer. Consumers, in my opinion, must be patient and have faith in the RBI to combat inflation and revitalize the economy."

Hiranandani added, that despite the RBI's strategic decision to raise repo rates to control inflation, the buyer of real estate seems to be less influenced by the most recent increases. Even with the rate hikes, recent quarter performance has been strong, reflecting the increased movement of home purchasers to purchase homes. A recent report on current residential sales numbers highlights the boost that the quarter witnessed primarily from the luxury segment. Higher premium sales levels are the result of rising demand for larger properties, recovery of buyer confidence, and greater NRI interest.

However, the latest 50 basis points hike in repo rate is expected to impact both home buyers and home loan EMIs for a short-term period.

Ramani Sastri - Chairman & MD, Sterling Developers said, "The RBI move might have an immediate impact on home buying for a short-term as the recent consecutive repo rate hikes have already added to buyers’ overall acquisition cost. Rising interest rates along with elevated property construction costs and product price pressures could adversely impact the real estate sentiment when buyers are likely to invest in their dream homes foreseeing the festive season. The real estate sector had just started seeing gradual recovery across key property markets, driven primarily by end-users and this decision will have an adverse impact for the interest rate-sensitive Indian real estate sector."

"However, despite the odds, we’re still hopeful as there is significant pent-up demand from a very large population base and first-time homebuyers. Many high-frequency indicators are also suggesting that the economy has been recovering in a robust way and this will influence real estate positively," Sastri added.

Meanwhile, Lincoln Bennet Rodrigues, Chairman & Founder, The Bennet, and Bernard Company, said that the impact of rate hike will be predominantly on the affordable housing side, which is primarily driven by sentiments and especially first-time home buyers who are heavily reliant on home loans. This decision will not make much difference in the luxury segment as the demand of home buyers in this segment is beyond these considerations. Also, the affordability and the disposable incomes of new-age homebuyers are much better today than a few years ago due to the increased job and wage growth in most sectors in the country and this is a silver lining for the sector.

"The current environment of repo rate hikes is not expected to last forever, and eventually, the rates are likely to come down again. We believe the positive sentiment will continue in the luxury segment driven by changes in buying patterns post the pandemic," Rodrigues added.

In FY23, to tame inflationary pressures, RBI first raised the repo rate by 40 basis points in May and further by 50 basis points in June. The latest hike of 50 basis points - takes the total hike to 140 basis points in the policy repo rate.

RBI is expected to continue in raising the repo rate in upcoming monetary policies. If that is the case, home loan EMIs may continue to get costlier ahead making a chunk in borrowers' pockets.

Bankers see the RBI repo rate to reach 6% by end of this year.

Yes Bank economists said, "with the trajectory of CPI inflation pointing downwards, we expect the RBI to moderate the pace of hikes and raise the repo rate by 25-35 bps in September and 25bps in December to 5.90-6.00% and pause thereafter to assess the growth-inflation dynamics."

"We expect the RBI to continue with its rate hikes in the upcoming policies taking rates up to 5.75% by the end of the year," HDFC Bank economists said.

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