Raghuram Rajan's Biggest Repo Rate Cut: 'Achhe Din' For Home Buyers

With great expectations come great disappointments. But, RBI Governor Raghuram Rajan is not a central banker who disappoints the people who have great expectations from him. After slashing the repo rate by 75 basis points (bps) since January 2015, in one fell swoop, he reduced repo rate by 50 bps in the September monetary policy review.

In the monetary policy review held on September 29, Rajan seemed keener on reducing the borrowing costs of the common man. “While the Reserve Bank's stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 bps cut in the policy rate are removed,” the policy statement issued by the RBI said. This could be true, because State Bank Of India (SBI) has already cut its base rate by 40 bps.

Even though the RBI cut its repo rate thrice prior to this, banks were hesitant to pass on the benefits. Banks claimed that a 25 bps cut would not reduce their borrowing costs much. But, as the cut was as high as 50 bps this time, banks do not have legitimate excuses to not pass on the benefits to home loan seekers and other borrowers. The CEO of HDFC Bank too agreed that banks are in a position to cut rates. “We will benefit from lower interest as well as lower risk weightage on affordable housing,” he said in a TV interview. Around 60 per cent of a bank's loan book caters to residential property in the affordable segment.

The RBI also proposed reducing the risk weightage on low cost home loans for households that belong to economically weaker sections (EWS). Currently, the minimum risk weightage on individual home loans is 50 per cent. However, the proposed reduction in risk weightage is for well-collateralised individual home loans. This implies that middle-class home buyers will be able to borrow at a lower interest rate from banks, making homes affordable.

Why wait-till-Diwali offer by RBI

Real estate developers feel that the RBI's decision to cut rates would urge more potential home buyers to clinch the deal. “The crackle will start much before Diwali this time,” Getamber Anand, President, Confederation of Real Estate Developers' Association of India (CREDAI), told PropGuide. He hopes that the residential property market, which has been sluggish for the past two years, will become more vibrant once the festive season begins in mid-October. “Credible developers and those who have delivered in the past will witness greater sales.” Anand said.

In the current year, real estate market would witness greater number of launches and better sales. The sales and number of new launches have seen a downfall over the past two years because of declining demand from home buyers. Now, that repo rates are back to where they were in early 2011, they have reasons to celebrate.

“This move comes at right time. We hope that banks will pass on the benefit to customers immediately, especially as we are soon going to celebrate the festive season of Dussehra and Diwali. We are sure it will stimulate demand for residential real estate as equated monthly instalments (EMIs) will decline.” said Rajesh Prajapati, Managing Director, Prajapati Constructions.

Real estate developers too have been holding on to large loan books. They will benefit if their own interest costs will come down. “The timing is good because developers await the festival season for new launches. This could bring some relief and light to the industry,” said Deepak Joshi, the President and Chief Business Officer of Religare Housing Development Finance Corporation Limited.

Will developers sweeten the pie?

Residential real estate sales have been slow because home buyers have been waiting for banks to cut interest rates and real estate developers to cut prices. While the first condition has been fulfilled to a large degree, the second has been happening very sporadically.

Developers are still very hesitant to cut prices. “We have always been saying that except in Tier-I cities, prices have been at around Rs 3,500 to Rs 5,000 per sq ft, even in places like Noida Extension and Yamuna Expressway that are affordable. We expect the RBI's rate cut to encourage buyers.” said Anand.

“It would be a great help if real estate players cut down prices,” Raghuram Rajan said over a month back, on the unsold inventory of homes. The RBI has been 'accommodative' with its rate cut in 2015. Now, it is the turn of real estate developers and home buyers to help themselves.