On February 7, 2025, the Reserve Bank of India (RBI) reduced the repo rate by 25 basis points, bringing it down from 6.5% to 6.25%. This marks the first rate cut in five years and is expected to have several positive effects on the real estate sector in India. The Monetary Policy Committee (MPC), led by Governor Sanjay Malhotra, also lowered the Standing Deposit Facility (SDF) rate to 6.0% and the Marginal Standing Facility (MSF) and Bank Rate to 6.5%.
Impact on Home Loans and EMIs
Reduced EMIs: The repo rate influences interest rates on loans, including home loans. When the RBI lowers the repo rate, banks typically reduce their lending rates, making home loans cheaper. This results in lower Equated Monthly Installments (EMIs) for existing borrowers and makes borrowing more attractive for new homebuyers.
Potential Savings: According to Adhil Shetty, CEO of BankBazaar, a 25 basis point cut could significantly reduce the interest outgo for home loan borrowers. For example, on a ₹50 lakh loan with a 20-year tenure, savings of ₹4.20 lakh could be realized over the loan period, potentially reducing the loan period by 10 EMIs.
Boost to Housing Demand: Real estate developers have welcomed the RBI's decision, anticipating that it will make home loans more affordable and boost housing demand, particularly in the affordable and mid-income segments.
Overall Positive Effects on the Real Estate Market
Increased Affordability: The rate cut, combined with the increase in the income tax exemption limit to ₹12 lakh, creates an environment that encourages consumer spending and home ownership.
Boost to Sales: Lower interest rates are expected to increase sales, improve liquidity, and reduce the inventory of unsold homes, encouraging developers to launch new projects.
Positive Sentiment: Lower borrowing costs improve financial predictability and strengthen buyer confidence, sustaining real estate growth, particularly in major metropolitan regions.
Considerations and Challenges
Bank Transmission: The effectiveness of the rate cut depends on how quickly and fully banks pass on the benefits to borrowers by adjusting their lending rates.
Inflation Impact: The ultimate impact will depend on how inflation affects property prices in the coming months. Rising property prices could offset some of the gains from the rate cut.
Limited Direct Impact: While the rate cut is a positive step, some realtors feel that it might have a "limited direct impact" on the sector and have advocated for further reductions to provide a stronger impetus to housing demand.
Commercial Real Estate and REITs
Commercial Real Estate Benefits: The rate cut could also benefit commercial real estate, as lower borrowing costs can help businesses invest in office spaces.
REITs Attractiveness: Real Estate Investment Trusts (REITs) may become more attractive to investors seeking stable returns in a lower-rate environment.
SBI's Perspective
Lending Rate Adjustments: State Bank of India (SBI) expects a decline in its lending rates linked to an external benchmark (EBLR). Nearly 28% of SBI's loan book is linked to the repo rate.
Deposit Rate Considerations: SBI anticipates that most lenders will wait until the next quarter to assess whether to cut deposit rates, considering the busy quarter and the need for deposits to support credit growth.
Overall, the RBI's repo rate cut is expected to provide a positive boost to the real estate sector by making home loans more affordable, encouraging consumer spending, and increasing housing demand. However, the full impact will depend on various factors, including how banks transmit the rate cut benefits to borrowers and how inflation dynamics unfold in the coming months.
Disclaimer: This article is for informational purposes only and should not be considered financial advice. Please consult with a qualified financial professional before making any investment decisions. The content of the above article is based on references, learnings and interpretations. Invest Corners does not guarantee the accuracy of the information provided.
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