Repo Rate Hike by RBI: Will It Affect the Real Estate Sector

Recently, the Reserve Bank of India (RBI) hiked up its repo rate by 25 basis points, raising the total interest rate to 6.5%. According to industry experts, the increase is nominal and is not expected to affect the real estate sector. However, property developers and consultants think that the hike will in turn raise interest rates on home loans and may impact demand for affordable and lower-middle-income housing segments. It's important to note that this is the 6th consecutive hike, and the sector is now looking for stability. Also, the rate is at its highest point since the past 4 years

How The Repo Rate Hike Will Impact the Real Estate Sector

Let's look at how the hike in repo rate can impact the real estate sector:

Control inflation

The RBI increases the repo rate to control inflation. A higher repo rate reduces the amount of money in circulation, which can help reduce inflation. Lower inflation can lead to more stable economic conditions and a better investment climate in the long term.  

Ashwinder R Singh, CEO-Residential, Bhartiya Urban, said, "Although a rise in interest rates will be difficult for many people with home loans, it can help people save more, help them build wealth, and reach their financial and housing goals. Often, an increase in interest rates means a strong and growing economy, which leads to more job opportunities, higher wages, better financial security, and more home sales for many households. In this regard, India is doing well compared to the rest of the world."

Increase in borrowing cost.

For both developers and homebuyers, the hike in the repo rate directly impacts the borrowing cost. This can decrease real estate demand as people may postpone their buying decision due to higher interest rates. This, in turn, can result in a slowdown in the real estate sector. 

Anuj Puri, Chairman, Anarock Property Consultants, said, "With repo rates now at 6.5%, there can be some repercussions on housing demand as home loan interest rates will rise further. The rates had already crept up after 5 consecutive rate hikes over the last year. This will increase the financial burden on homebuyers because apart from home loan interest rates, property prices have also gone up in the recent past two to three quarters."

Improve economic growth

Controlling inflation through a hike in the repo rate can help create a stable economic environment that promotes long-term growth. This can lead to increased investment and more business opportunities, which can benefit the real estate sector in the long run.  

Ankit Kansal, MD & Founder, Axon Developers, said, "The recent decision by the RBI to hike the repo rate by 25 basis points is expected. The global economic outlook has improved, but uncertainties remain. Besides geopolitical threats and market volatility, the prices of petroleum and non-oil commodities are rising, which will weigh on global economic growth. This may impact inflation, which is already high in India. Thus, raising interest rates makes perfect sense, as the goal should be to strike the right balance between growth and inflation."

He also added, "Meanwhile, the government must recognise the economic importance of the realty sector, which not only accounts for 8% of the GDP but also is the second most employment generator after agriculture. Any increase in home loan rates needs to be balanced with policies and incentives to reduce construction costs and incentivise sales. Initiatives such as rationalising GST rates, reducing stamp duty, lowering capital gains taxes, and increasing the income tax waivers on home loan interests can accelerate the overall property market. Even if the governing bodies identify and implement one or two such initiatives, it will positively impact the overall industry."

Final Words

While a hike in the repo rate can have some negative impacts on the real estate sector in the short term, it has positive impacts in the long term by creating a more stable economic environment.

Dushyant Singh, Orion One32, said, "Compared to previous decisions, RBI has raised the repo rate moderately, this time only by 25 bps, as inflation remains a long-standing concern for the economy. The increased home loan interest rates would be a burden for homebuyers, but the commercial segment is expected to grow due to better returns on investment. However, the tax rebate policy and the government's increased incentives for infrastructure development would offset the impact of the repo rate hike, and demand for real estate projects would remain strong."

About PropertyAngel

PropertyAngel is a leading O2O (online-to-offline) second landlord platform. We are a Bangalore-based property management company offering professional property management for individual apartments, houses, and villas. Contact us at (91-80-47095974) or (91-7406484455) if you need guidance on how to invest in the right property in Bangalore.