Interest Rate Moderation Bodes Well For Residential Realty

The latest moderate repo rate hike of 35 bps by the RBI is a good omen for the real estate sector. It signals a  turning point in the interest rate cycle that is expected to end its upward movement in the next financial year…Vinod Behl

RBI has increased repo rate for the fifth straight time this year to curb inflation. In its latest December credit policy, the apex bank has increased repo rate by 35 bps to 6.25% Against much sharper hikes earlier, the present increase is quite reasonable, displaying the balancing act of the RBI to both tame inflation and ensure growth. In all, there has been a 225 bps increase in repo rate since May 2022 when the long cycle of rate cuts was reversed.

With a long cycle of rate cuts, home affordability had been continuously on rise in the last many years due to progressive policies favouring affordable housing. Despite 190 bps cumulative rate hike prior to the current hike, home affordability sentiment, according to JLL Home Purchase Affordability Index (HPAI) 2022, remained attractive. Even with the present interest rate hike, home loan rates below double digit, are within tolerable limits. RBI may well go for another moderate 25 bps rate hike in its February 2023 credit policy review. Thereafter, interest rates may stay there for a few more months before the RBI takes a call to restart the cycle of rate cuts after guiding the inflation to stable levels.

What is really an encouraging sign is that global rating agencies including Fitch and Moodys have forecasted a growth rate of 7% in FY 23. Moreover, economic growth is broad-based. It has happened across various sectors. The agricultural and manufacturing sectors are sustainable while the services sector has shown strong growth. Further, moderation in commodity, crude oil, and other prices is another favorable factor.

As we enter the last quarter of the current financial year, liquidity is expected to be surplus and stable. Experts believe that in view of this unfolding of a positive scenario, the current trend of housing growth will not be hit. Niranjan Hiranandani, Vice Chairman of Naredco and CMD of Hiranandani Group’s optimism is based on prevailing growth impetus backed by real demand translating into actual transactions, reflected through incremental sales registered in the market. Harsh Vardhan Patodia, President Credai also strikes a positive note, saying that despite a series of rate hikes, the continuous high home sales during 2022 and with robust consumer sentiment, real estate is in an advantageous position. Anuj Puri, Chairman Anarock discounts any serious impact of interest rate hikes on home sales as long as interest rates remain in single digits.

The positive sentiment expressed by experts is also reflected through healthy home loan disbursals. The loan portfolio of India’s largest bank- SBI, has achieved the Rs 5 trillion mark in January 2021. The bank expects its portfolio to touch Rs 7 trillion by FY 24 on the back of the strong desire of millennials to own a home, rising incomes and the government’s favorable policies like interest subsidy, and reduction in stamp duty. And all this bodes well for residential real estate in particular and the real estate sector as a whole..