Real estate professionals provide contracts to their clients to discuss purchasing a home.
The country’s consumer price index inflation shot up to 6.4% in February, the second consecutive month in which retail inflation remained well above the Reserve Bank of India’s acceptable limit. Despite high retail inflation, the central bank maintained status quo during the Monetary Policy Committee (MPC) meeting in April and kept the repo rate steady at 6.5%. The move brought temporary relief to homebuyers.
Tracing the timeline, the RBI raised the repo rate to 4.4% for the first time in May 2022, keeping it constant at 4% (April 2020 to April 2022) during the COVID-19 pandemic. Since then, the central bank has raised the repo rate by a cumulative 250 basis points to 6.50% in FY2023. While the decision was seen as a reasonable step to control rising inflation, it raised concerns within the real estate sector. This was taken at a time when the industry was seen recovering from the impact of the COVID-19 pandemic and the market was gaining momentum after a long period of decline. Fortunately, the momentum created by pent-up demand in 2022-23 managed to offset the impact of the repo rate hike to some extent, and the year ended on an upbeat note, marking the highest residential launches and sales in nearly a decade. recorded the highest number of The growth in the Indian real estate sector is driven by strong fundamentals post structural reforms like RERA, GST etc. These regulatory changes ushered in transparency in the sector and boosted the confidence of stakeholders, resulting in strong demand for housing post the pandemic.
The first quarter of 2023 recorded the highest number of residential launches and sales in a single quarter.
The RBI kept the repo rate unchanged at 6.5% during the Monetary Policy Committee (MPC) meeting in April. This is a welcome move for the real estate fraternity.
The first quarter of 2023 recorded the highest number of residential launches and sales in a single quarter. The growth is driven by strong fundamentals and a healthy balance between demand and supply. The recent pause in repo rate hikes is likely to further boost demand and provide scope for fresh supply.
However, with the headwinds of a continuing global slowdown, as well as rising asset prices and geopolitical tensions, another repo rate hike in the future could have a stronger impact than seen over the past few quarters. The current situation, marked by rising cost of manufacturing raw materials, portends an uneasy road ahead for the industry. The increase in the cost of construction raw materials along with frequent repo rate hikes over the past one year has resulted in a significant increase in EMIs for homebuyers.
As the EMI keeps increasing at regular intervals, a larger portion of the borrower’s income will be allocated towards loan repayment, reducing the amount available for household budget planning. Given that an increase of 250 basis points in the repo rate has a large impact on the EMI, this could lead to a risk of default. Therefore, banks would prefer to be prudent and take precautions to prevent such situations, which may result in reduction of overall credit worthiness. Apart from rising home loans, rising cost of construction may prompt developers to increase their prices further, which will have an additional impact on homebuyers and potentially dampen market sentiment over time.
With such tightening measures, provisional retail inflation (5.7%) in March fell within the RBI’s target range, which may prompt the central bank to reduce interest rates. This is important as increased interest rates not only affect the real estate market but also the cost of doing business. Consequently, we expect the repo rate to remain stable for one more quarter, which will eventually strengthen the economy and create a conducive environment for the real estate industry to function efficiently in the coming future.
The writer is CEO, Vestian