Home loan interest rates are likely to drop further as India's consumer price index (CPI) inflation eased sharply to 4.25 per cent in May hitting a 25-month low and came under the Reserve Bank of India's upper tolerance limit of 6 per cent for the third straight month. Retail inflation for housing stood at 4.84 per cent, up only 0.2 per cent from April's inflation print, according to data released by the Ministry of Statistics and Programme Implementation.
In addition, the Reserve Bank of India (RBI) kept its key lending rate steady at 6.5 per cent in its second monetary policy committee (MPC) stance for the current fiscal, as announced by RBI Governor Shaktikanta Das las week. RBI's stance on pausing the repo rate was widely expected by economists. However, the RBI signalled that monetary conditions will remain tight for some time as it looks to further curb inflationary pressures.
The decision to keep the repo rate unchanged is a positive development for home buyers and investors, as it provides them with some stability and reduces uncertainty and volatility associated with interest rate fluctuations, according to industry experts. ‘’India’s housing sector is witnessing a strong rebound in the recent past driven by various factors such as affordability, lifestyle upgradation and aspiration of customers to own homes and we see this up-cycle continuing in 2023 fuelled by both end-user and investor interest. In such a context, another repo rate hike by the RBI would not augur well for the real estate sector as home loan interest rates are already at a higher level,'' said Ramani Sastri - Chairman & MD, Sterling Developers.
Economists believe that RBI's rate-hike cycle impacts housing sales and rate-sensitive segments in the industry. Low inflation print and steady rates boosts consumer sentiment and leads to better demand for luxury properties as well. ‘’While the rising interest rates in the recent past have certainly impacted the sales of rate-sensitive segments of affordable and mid segment housing, but it did not have any impact on the luxury housing,'' said Lincoln Bennet Rodrigues, Chairman & Founder, The Bennet and Bernard Company, known for luxury themed homes in Goa.
‘’However, a reduction in the key rates going forward would be widely celebrated as low interest rates have been a crucial factor in the revival of overall real estate demand and improvement in the liquidity situation which is vital for the sector,'' added Rodrigues.
Also, separate government data showed that the index of industrial production (IIP) rose 4.2 per cent in April 2023 from 1.1 per cent in March, compared to 6.7 per cent in the year-ago period. "Both inflation and IIP growth have surprised positively. In retrospect, it vindicates the MPC's decision to hold rates as well as the monetary policy stance,'' said Rupa Rege Nitsure, Group Chief Economist, L&t Financial Holdings.
"Going ahead, El Nino, rupee depreciation and services growth momentum pose the upside risks to inflation trajectory. Higher growth of consumer non-durables is encouraging and shows improved rural demand situation,'' added Nitsure
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