RBI Hikes Repo Rates, Realty Sector Gets Affected
The Reserve Bank of India (RBI) increased the repo rates by 25 base points (bps) to 8% in order to curtail inflation. ‘Repo rates‘ are essentially the rates at which banks borrow short-term money from RBI. With the increase in interest rates for borrowing money, there are chances that home, vehicle and other loans become more expensive. With home loans becoming more expensive, the real estate market will again get affected.
Third increase in one year
The move from the RBI has come at a stage when the rupee value has weakened significantly over the past one year. In order to combat the inflation that has stemmed from the rupee depreciation, the RBI came up with a hike in the repo rates. This, however, is not the first hike during this financial year. The repo rates were increased twice since the new governor was appointed in September 2013. However, the RBI governor has defended the move saying that though the headline inflation has been controlled, the core inflation is still high. He also said that further increase in the rates is unlikely in the short term.
Hikes in rates affect home sales
While the RBI has defended its move, the realty industry has expressed grave concerns over the RBI’s move. Builders have said that the move has sent negative vibes as well as fear in the industry. Increased repo rates may influence banks to increase interest rates on home loans. This increase will negatively impact the home buyers.
The largest section of home buyers in the country belongs to the middle and upper-middle class groups. One of the reasons for low sales during the last quarter of 2013 was the fear of increased loan rates. With home buyers increasingly sitting on the fence due to this fear, developers will be left with unsold inventory. Developers in cities of Mumbai and Delhi are already struggling with inventory pile up of at least 2-3 years. The current increase in rates may lead to an additional inventory pile up.
Developers claim that the RBI did not need to hike the repo rates as the inflation is already in control. Without flexible credit facility, the realty sector will face difficulties in growth. Instead, there must be other policy changes that support the realty sector such as rate cuts, as the realty sector has a potential to turn around the current state of economy.
Banks deny increase in lending rates
Bank officials have, however, said that the hike in repo rates will unlikely change the home loan interest rates available to the public. Top officials of two well-known banks have said that increase in lending rates of banks does not necessarily depend on the rate of borrowing. For example, the home loan rates did not change over the last few quarters even while the borrowing rates increased. On the contrary, the banks have supported the move by the RBI.
According to banks, lending rates are more dependent on cost of funds, which is more a function of inflation. Hence, if inflation increases, lending rates will increase. With an increase in repo rates, inflation can be curbed and with a downward trend in inflation, the rates may be lower during the second half of the financial year.
