The 25 basis points hike in repo and reverse rates by the Reserve Bank of India is likely to impact home loan rates, which eventually would dampen the demand for residential property

Of late, the Reserve Bank of India (RBI) has increased the repo and reverse repo rates by 25 basis points and has further hinted to hike rates as a part of its tight monetary policy. This decision to raise policy rates can be considered as direct fallout of the soaring inflation in the country, which currently stands at 9.89%, surpassing the apex bank’s March-end projection of 8.5%.

Consequence: Increase in policy rates to impact home loan rates, which eventually would dampen the demand for residential realty. General public, too, feel in the same way, as reflected in a recent poll conducted by ConstructionBiz360, where a whopping 100% answered in the affirmative.

“The impact on the residential segment is yet to be felt as banks have not raised the home loan rates,” says Anuj Sharma, a Noida-based realty analyst. Mr Sharma added that the current demand for properties will persist only if the home loan rates are not raised to double-digit figures. At present, most banks are offering home loans at 8-9% interest rates.  

Expert comments

Some industry leaders and analysts are of the opinion that apart from housing loan rates, increase in policy rates will compel banks to hike their lending rates. Consequently, realtors with higher cost of funds are likely to pass this to end-users, which in turn may destabilise the current demand scenario.

“Post-hike scenario, there has been no impact on demand. Moreover, volumes have gone up in cities such as Pune, Ahmedabad, Hyderabad and others. However, any further hike by RBI will definitely work as a deterrent for the housing sector, but not to a very great extent,” says Lalit Kumar Jain, chairman of Kumar Urban Development Ltd, a leading property firm based in Pune.

On the brighter side, the Indian residential real estate market is expected to gain momentum in 2010 due to improving economy, better liquidity and rising demand, says a report by the reputed research house CRISIL. The global ratings agency Fitch has also expressed the same opinion in one of its recently published research reports.

Jeeta Bandopadhyay