The much awaited cut in repo rate by 50 basis points announced by RBI is seen as a key trigger to boost investment demand in the economy. The home loan and real estate sectors are going to be the largest beneficiaries.
State Bank of India, the country’s largest bank, has announced lowering of its base rate from 9.7% to 9.3% with effect from October 5, 2015. Thus interest on home loans will get reduced to 9.3% for female borrowers and 9.35% for male borrowers.
The reduction of 0.4% in interest rate will reduce the EMI (Equated Monthly Instalment) by Rs. 25-30 for every Rs. 1 lakh loan for a repayment tenure of 20 to 30 years. The reduction in base rate will also benefit existing borrowers as their EMIs will come down accordingly. Other leading players such as HDFC and ICICI are expected to follow suit in the next couple of days.
Helping fence-sittersWith the reduction in EMIs, the eligibility of home loan amount will increase considerably. Coupled with the festival season and bonus amounts in the pocket, it is expected to prompt fence-sitters to decide on buying their dream home, thus easing pressure on builders who have a huge inventory of unsold units.
Since cost of funds for builders and developers will also come down considerably and the inflation rate is expected to continue to be lower than 5%, the improved scenario should act as a catalyst for builders to reduce the selling price by 10 to 20% to dispose of unsold inventory and concentrate on announcing much larger new projects.
(The author is Director, Institute of Home Finance)
