Industry reactions to RBI increase in repo rates

RBI increased policy repo rate by 50 basis points (bps) to 5.9% making loans expensive.

RBI Governor Shaktikanta Das | Photo Credit: AFP

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on September 30, 2022 increased policy repo rate by 50 basis points (bps) to 5.9% making loans expensive. 

The MPC also lowered the growth projection of FY23 from 7.2% to 7%.

Following are the industry reactions

Borrowings to be costlier

The back-to-back repo rate increase will make borrowings costlier for the industry already reeling under demand slowdown from key export markets, chairman of engineering exporters body EEPC India Mahesh Desai said. Engineering goods exports saw a sharp decline in shipments in August signalling tough times ahead, he said.

"We hope the government would take policy measures to minimise the impact of external factors on the engineering sector. The lowering of FY23 GDP growth forecast by RBI to 7% is primarily the effect of external factors and hence requires fresh measures to boost exports", Mr. Desai said in a release.

Pass through unlikely soon

While increase in the repo rate was expected amid the central bank intensifying its efforts to tame inflation, the possibility of banks passing on this increased cost to borrowers during the ongoing festive season is low, said Dhruv Agarwala, Group CEO of Housing.com.

"Considering that a large number of home buyers in India make their purchase decision during this time of the year, financial institutions would not like to dampen the festive spirit by effectuating a rate hike immediately, " he said.

The banks will eventually be forced to pass on this increased cost. Even when that happens, "the robust buyer sentiment along with renewed investors' interest in the residential real estate market is likely to continue to support the demand for homes in the country," he said in a release.

RBI stays committed to control inflation

Shishir Baijal, CMD, Knight Frank India said the RBI stays committed to control inflation and bring it closer to the comfort level of 4% by continuing to increase the repo rate and tightening the liquidity condition. Although, global crude and commodity prices have softened a bit, revival in domestic demand along with sharp rupee depreciation would continue to exert price pressures leaving no choice for the RBI but to raise REPO Rate by another 50 BPS taking the total rate hike since May 2022 to 190 BPS. While this is expected in line with the global trend, it will have its impact on the sentiments across all buying categories, especially in the wake of the current festive season.

Tight liquidity conditions along with the repo rate hike would lead to a significant rise in the cost of funding, impacting home loan rates as well. Going by the current trends we expect about 50% of this will be passed onto the home loan borrowers. A rise in home loan rates will further impact affordability across the markets. As per Knight Frank affordability index will deteriorate by another 2% This might slowdown home buying decision for a short to medium term. However, we hope, India’s steady economic growth and revival in consumer’s sentiment towards the economy will bring back confidence amongst the end users and support their home buying activities.

Increase in repo rates do not augur well for real estate sector

The increase in repo rate does not augur well for real estate sector, especially residential segment since it will result in increased mortgage rates, said Samantak Das, Chief Economist and Head of research and REIS, JLL, India.

From April 2022, RBI increased the repo rate by 140 bps while home loan rates moved up by an average of 80 bps or more than 50% transmitted to date. Thus, transmission of the change is based on an individual bank’s decision, he said.

Taking a cue from previous transmission, “we expect home loan interest rates to go up 25-30 bps. The rate would still be below what homebuyers paid 8-9 years ago, which was more than 10%. It is likely banks might also delay the transmission, taking into account higher housing demand during the festive season,” he said.

With the latest increase in repo rate, revised home loan EMI would go up by an average of 8-9% as compared to 6 months ago. The continuous rise in home loan EMI is expected to act as a sentiment disruptor. “We believe home loan interest rates inching towards 9% and above may result in moderation of housing sales growth in the medium term, especially post the current festive season,” he said.

Founder and CEO of NestAway Technologies Amarendra Sahu said the increase in repo rates will push up prices for homebuyers, further affecting housing affordability. “Home mortgage rates are now back to pre-COVID levels or even higher. This is likely to increase traction in the rental segment. A higher home acquisition cost and interest rates will make renting far more affordable. Homebuyers are likely to wait for the current cycle to get over,” he said.