NEW DELHI/MUMBAI: The RBI raised its key policy rate by 25 basis points on Wednesday, which will result in higher borrowing costs for home loans and other types of loans. The Reserve Bank of India (RBI) has raised interest rates by 250 basis points for the sixth time in a row, beginning in May 2022. The RBI's repo rate, which is the rate at which it lends money to banks, was increased from 6.25 percent to 6.5 percent by a vote of 4:6 on the monetary policy committee. Because the majority of retail loans are linked to the repo and are immediately re-priced, the rate increase will have an immediate impact on individual borrowers as well as small businesses. Shaktikanta Das, governor of the RBI, stated when announcing the MPC decision that inflation was decreasing and that "the worst is behind us." Core or underlying inflation's stickiness is cause for concern. We require a clear moderation. He stated, "We must maintain our unwavering commitment to lowering inflation."
As a result of the increase in lending rates, banks will have more room to offer higher returns without sacrificing their margins, which is good news for depositors. Das stated that the real policy rate—the rate adjusted for inflation—has moved into positive territory as a result of the rate increase.
The governor was anticipated by many analysts to make a policy shift and hint at suspending rate hikes. Das stated that it was impossible to provide forward guidance and that there was no such reassurance.
Due to the competition for home loans, some new borrowers with high credit scores can borrow at 8.5%. However, older borrowers who took out loans at 6.5% earlier this year will see their borrowing costs rise to 9%. Das stated that urban activity is strengthening, particularly in services like travel, tourism, and hospitality, and that domestic passenger traffic has increased to levels not seen since the pandemic. Additionally, a number of high-frequency indicators point to an increase in activity. The activity of investing continues to gain momentum. “Compared to Rs 12.2 lakh crore a year ago, the total flow of resources to the corporate sector increased to over Rs 20.2 lakh crore,” Das stated.
The governor expressed optimism regarding the economy despite his continued caution regarding inflation. India's economy remains resilient, according to available data for the third and fourth quarters of 2022 and 2023. According to Das, a sustained recovery in discretionary spending, particularly on services like travel, tourism, and hospitality, has been driving a firming up of urban consumption demand.
According to real estate experts, the policy may reduce housing demand. Anuj Puri, chairman of Anarock Group, stated, "With the appreciation in real estate prices over the past few quarters, any increase in interest rates, which had already exceeded the 9.5% mark, would put pressure on sales volumes in the affordable and lower mid-range housing segments, which are more cost-conscious."
According to Shishir Baijal, chairman and managing director of Knight Frank India, the increase in interest rates has not yet had much of an effect on the housing industry. Over the past year, the affordability index from Knight Frank has slightly deteriorated by an average of 1.4%. As evidenced by the 16% increase in demand in December 2022, demand for home loans has remained robust over the past year. According to Baijal, "We hope that this rate hike will not have a negative impact on consumer sentiments regarding home purchases in the upcoming financial year."