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How a repo rate reduction by RBI can help real estate sales

How a repo rate reduction by RBI can help real estate sales

How a repo rate reduction by RBI can help real estate sales

Of late, the Indian real estate market has been seeing favourable headwinds courtesy multiple factors including pro-active measures by the Government (think RERA, PMAY interest subsidies and lower GST rates) and stable or corrected property prices along with the emphasis on affordable housing. Another key factor has been the comparatively lower rates of interest on home loans courtesy two back to back repo rate cuts from the RBI (Reserve Bank of India).

Now, in true heroic fashion, the RBI has hit it out of the stadium (yes the World Cup’s on!) with another repo rate cut. This is the big news that Indian realty was waiting for since it will infuse some more wind into the sails for the industry which still needs more love and care (yes customer interest and sales in that order!) to recover and fully thrive again.

RBI’s latest repo rate cut detailed

The RBI’s MPC (monetary policy committee), comprising of 6 members, has already met and the panel spearheaded by Shaktikanta Das, the RBI Governor, has decided to implement another cut in repo rates or the key policy rates. This rate will now be 5.75% after a cut of 25 basis points. It was 6.0% previously. The new repo rate will come into effect almost immediately and spells good news for the housing finance and real estate sectors as opined by experts.

Here are some of the key aspects worth keeping in mind in this regard:

  • The reverse repo rate (under liquidity adjustment facility) now stands at 5.50%.
  • The MSF (marginal standing facility) rate and bank rate have now been kept at 60%.
  • The neutral stance of the apex bank was present post the previous cut in repo rates back in April 2019.
  • However, the stance has now been transformed into accommodative which will be a major boost for the market overall on account of the previous slump.
  • The repo rate is the rate of interest at which banks borrow from the RBI. Whenever the borrowing cost is lowered for banks, they can reduce their MCLR (marginal cost of funds based lending rate) accordingly.
  • This may lead to lower rates of interest on home loans for new customers and also for existing borrowers post their reset date.
  • The decisions taken by the RBI are aimed at ensuring CPI inflation of 4% within the +/-2% band while driving further growth.
  • The repo rate has now come down to its lowest percentage ever since the month of July in the year 2010 as per reports.
  • The 6 member MPC body had a unanimous vote in favour of this 25 basis point rate cut and the change in stance.
  • The real estate and automobile sectors should be in for a major boost as a result of this decision.

How the real estate sector will benefit

The latest decision by the RBI to cut repo rates by 25 basis points may galvanize sales figures further in the real estate sector which is sensitive to rate changes. Banks will naturally be lowering MCLR owing to this repo rate cut and hence new home loan borrowers will benefit and so will existing borrowers once their MCLR is reset after a particular time period. This will naturally lead to higher sales of projects to new homebuyers who will be further enthused by the lower home loan interest rates on top of the cut in GST rates sometime earlier.

Home loans and car loans will both become more affordable in the near future. In case banks transfer the entire repo rate cut benefit to borrowers, new rates of interest could be lower by anywhere between 0.5-0.25% and EMIs of borrowers will reduce accordingly, sparking further demand for homes. The higher the loan amount, the bigger will be the savings for home loan customers. As a result, this new policy should be wind in the wings for the realty sector which is looking up but still combating a liquidity crunch, project delays and unsold inventory levels.

The benefits may not be immediately felt in a huge manner since the RBI has not yet decided on benchmarking new floating rate retail (home, auto) loans or personal loans to the repo rate or other external benchmarks. The repo rate was cut by 50 basis points over February and April this year although the full benefit is yet to be passed onto customers. Yet, with this repo rate cut, there should be lower interest rates and EMIs on the anvil for homebuyers. The RBI is aiming for swifter transmission of the benefits to home loan customers and borrowers in other categories impacted by the repo rate cut. As a result, banks will naturally be slashing MCLR rates as per expectations which will lead to higher sales figures for Indian real estate.

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