Good News: Interest Rates Are Set To Drop

In our previous post, we wrote of the improving sentiment in the Indian real estate sector, that housing activity is slowly on the upswing with improved market conditions.

What is investment but buying? Economic factors impact buying trends. When prices are high, people have less money to spread over various needs and hence big ticket investments have to be deferred. People stop buying to cope with inflation. When prices fall, the market mood becomes positive and investors feel encouraged to buy anything, property being no exception.

Today’s rate cut

The RBI announcement¹ of a cut of 25 basis points in the bank repo rate² from 8% to 7.75%² has been received with much optimism. Although the rate cut was expected and is really quite small, the timing comes as a pleasant surprise, and real estate gurus are calling it a great way to begin the new year.

When the RBI cuts the lending rate*

The repo rate is the rate at which the central bank of a country (the RBI in India) lends money to commercial banks. It logically follows that when the RBI reduces the repo rate, banks in turn pass on the benefit to attract investors by reducing the cost of consumer loans. The current housing loan rates are anywhere between 10.5% and 12%. A rate cut will benefit the home loan customer by reducing the EMI and experts are advising investors to opt for the floating rate of interest and not to tie themselves to a fixed rate. Obviously, this is because today’s reduction is viewed as the the beginning of the ‘rate cut cycle’²; a cut of at least 100 points or 1% is expected in 2015.

‘Accommodative’ Monetary Policy Stance

Although builders and realtors feel that a greater rate cut is necessary (at least 200 points) it certainly feels like a revival of the India Growth Story of the early 2000s before recession struck. The Economic Times quotes Anuj Puri, Chairman and Country Head of the global property consultant, JLL India: “I expect this cut in interest rate to be the first of several to come³, and these will cumulatively make a big difference to home loan borrowers. As of now the current rate cut will help revive market sentiment, which is very timely.”

* For the investor and retail real estate buyer, the cut in repo rate means:

1.     Lower EMIs or shorter payback period
2.    Possibility to invest more / buy a larger home

*For the builder, it means:

1.    Easier borrowing from banks to complete projects that have been held up

2.    Faster sales and recovery from supply overload.