The marginal 0.25% cut in interest rate by the Reserve Bank of India in its February 2025 policy stance brings little cheer in terms of much needed boost to housing demand and sales, particularly for  price-sensitive budget housing. More rate cuts besides other supporting measures are needed to bolster residential demand and supply towards healthy growth of real estate.

Vinod Behl

Coming close on the heels of historic income tax rate cut in this year’s budget, the interest rate cut by the RBI was much anticipated. The RBI reduced the repo rate by just  25 bps to 6.25% to support growth amid easing inflation. But coming after five years, this cut is insignificant in terms of enhancing home affordability , especially as residential prices have reached unaffordable levels.

Moreover, equally significant is how quickly and effectively rate cuts are passed on by the banks to home loan takers. So far Punjab National Bank has reduced the Repo Linked Lending rate (RLLR) by 25 bps to 9% and Bank of Baroda has cut RRLR to 8.9%.

The external benchmark-linked home  loans  get repriced quickly to reflect the cut. However, MCLR- linked loans take up to 2 quarters to show the change in policy rates. About two-fifth of the banking system loans are linked to MCLR. Also, as per the RBI norms, lenders are required to reset their external benchmarked lending rate at least once in 3 months. As such home loan borrowers are able to get the benefit of lower interest rate once the lender resets the benchmark. It should also be noted that while most retail loans are linked to the external benchmark, corporate/developer loans are linked to the MCLR.

Even if the rate cut is transmitted soon, it will have limited impact on demand and supply. Home seekers have been facing triple whammy of high inflation, unrealistic high prices and elevated home loan rates. Moreover, amid high inflation, low salary hikes had hit their disposable income. Though income tax benefits in the FY26 budget will help to boost their income, , yet job insecurity and insignificant salary rises continue to weigh on them in 2025. This year, consulting firms expect salary revision in corporate sector to remain in single digit across industries and even below last year, due to slowdown in corporate earnings.

In this backdrop, the 0.25% interest rate cut has nothing more than sentimental value. Real estate industry bodies like Credai have made a case for further interest rate cuts to spur demand and sales. Realty experts opine that a minimum of  0.50% – 0.75% cut is required to boost housing demand particularly in budget housing which has been severely hit in the last couple of years. The problem is that for quite some time affordable housing supply has not been coming to market as developers find low-margins. As such home buyers are not finding inventory in the budget category (below INR 50 lakh) and in mid-priced category (INR 50 lakh-1.50 crore).

Beyond budget and RBI rate cut, the government needs to take measures to boost  demand and supply of budget and mid-priced homes. On the demand side, the threshold price limit of affordable homes need to be  revised upwards  from INR 45 lakh in Tier 1 cities and Metros to bring more home buyers under the umbrella of PMAY to avail interest subsidy benefits for boosting home affordability. On the supply side, measures like access to land and finance at reasonable rates, besides tax benefits to developers of affordable housing will do the needful.