Recently, most retail banks had raised their lending rates, this move is a response to the Reserve Bank of India’s decision to raise its benchmark lending rate by 50 basis points in order to control inflation. Although due to the change, the cost of borrowing will increase, it will not have a huge effect on residential real estate demand – especially as the industry heads into the festive season which has always triggered a increase in demand.
From 15e In August 2022, the external benchmark-based lending rate (EBLR) and the repo-linked lending rate (RLLR) increased by 50 basis points, while the marginal cost of the funds-based lending rate (MCLR ) increased by 20 basis points. As a result, EMIs will increase for borrowers who received home loans on MCLR, EBLR or RLLR.
In 2019, the government and RBI lobbied for better transmission of rate changes to spur economic growth. The RBI has ordered banks to link their floating rate loan products to key repo rates, treasury bills or other external benchmarks. The migration to the new loan pricing methodology has contributed to faster monetary transmission, with banks now forced to immediately pass on rate changes to their customers. Importantly, in order to maintain transparency, a bank will not be allowed to adopt multiple benchmarks within a single loan category. While rate hikes are immediately passed on to borrowers, deposit rates are lagging due to the excess liquidity currently in the system. There is growing pressure on banks to use their own funds to provide credit instead of depending on the central bank. This will invariably cause deposit rates to increase.
Since the rate hike was expected across all banks due to rising inflation, it will not impact the real estate sector, which has been growing steadily despite the pandemic. Strong demand over the past year has been, in part, due to historically low interest rates and a growing preference for larger homes. The market is now leaning heavily towards spacious homes with private outdoor spaces, accommodations for a home office and an abundance of social amenities. Home buyers prioritize space, security and well-being. Affordable financing incentivizes robust growth in sales and launches of high-end residential properties.
In addition, the recent decision by the RBI to increase the individual housing loan limit for co-operative banks by more than 100% will significantly boost demand in the affordable housing segment as a wider range of credit facilities will become available. for low and middle income groups. The increase in the loan limit is a boon for the affordable housing segment in the face of rate hikes. Since the affordable housing sector is the most attractive segment for developers and buyers, many reputable developers are expected to launch projects in the affordable segment. Stable interest rates would allow the real estate sector to focus more on affordable housing, which is seen as a growth engine for the Indian economy. Such inclusive initiatives facilitate a better flow of credit and provide home buying opportunities for all.
The opinions expressed above are those of the author.
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