What If The RBI Cuts The Repo Rate Further?

Interest rates deeply influence the demand for real estate. When interest rates are low, the equated monthly installments used to pay off a mortgage loan would be low too. While low interest rates alone do not ensure high demand for real estate, borrowing costs do influence the decision to buy a home. So, for the real estate sector, decisions made in the RBI's bi-monthly monetary policy review are crucial.

When the RBI cuts the repo rate (repurchase rate at which it lends to commercial banks), it directly influences the cost of borrowing. Over 90 per cent of the people who buy property in India take loans from banks or financial institutions. Some of them might finance as much as 85 per cent of the value of the property value through a mortgage loan. Eventually, the cost of your home depends on the interest rate charged on the loan. When coupled with appreciation in the value of property, high interest rates can make buying a home a difficult proposition.

What if the RBI cuts the repo rate further?

When RBI cuts the repo rate, banks often follow suit. In the past six months, the RBI cut the repo rate by 75 basis points over three policy meetings. If the RBI cuts the repo rate further, the rate at which it lends to commercial banks would decline by 1 per cent this year.

Banks, however, have not been equally generous. For instance, in 2015, the SBI, cut interest rates at which it extends loans to existing and potential home buyers by merely 30 basis points. Home buyers and financial institutions have been waiting for the RBI to cut the repo rate heavily, and this partly explains the weak demand for property in 2015. Home buyers have been postponing their decision to buy a home because they expect interest rates to fall further. They also expect developers to slash property prices because unsold inventory is currently high in Indian cities.

There is another reason. Banks have not been passing on RBI's rate cut to borrowers to the extent they should. However, if the RBI cuts the repo rate further, banks would feel more comfortable slashing interest rates. If banks compete in slashing interest rates, home buyers would get a better deal. To raise their home loan volume, banks might plan attractive home loan melas or schemes.

How would an interest rate cut help?

Here is how you can save around Rs 696 every month if your bank cuts the interest rate.  For example, on a mortgage loan of Rs 50 lakh for a 20-year period at an interest rate of 10 per cent, your EMI would be Rs 48,251. But, if the bank reduces the interest rate by 15 basis points, your interest rate will decline to 9.85 per cent. Then, your EMI will be Rs 47,555.

How long would it take for a rate cut to come in to effect?

It takes nearly three months for banks to transfer rate cut benefits to their customers. The effect is not immediate. At banks, a special committee known as the Asset-Liability Committee (ALCO) decides the interest rate. Banks also tend to 

cut the deposit rates before reducing interest rates on loans.

Will a further rate cut inspire confidence in the market?

The RBI's rate cut will also improve the confidence in real estate markets, boosting investment. This will have a direct effect on real estate and the automobile industry. Currently, both sectors are undergoing challenging times. Weak demand has compelled many builders to delay their under-construction projects in India. Some builders have been revising the master plan of their projects. Lower interest rates will inspire confidence in the market, raising property prices.

(Katya Naidu has been working as a business journalist for the last nine years, and has covered beats across banking, pharma, healthcare, telecom, technology, power, infrastructure, shipping and commodities)