The RBI keeps the repo rate constant, so home loan EMIs remain unchanged. With India’s inflation outlook improving, economists anticipate a rate cut in February.
The Reserve Bank of India (RBI) on December 6, 2024 reduced the cash reserve ratio (CRR) to improve system liquidity while maintaining the repo rate at 6.5 percent for the eleventh time. This also left home loan rates and monthly instalments unchanged.
The monetary policy committee, or MPC, holds that a solid basis for rapid growth can only be achieved through long-term price stability. In the interest of the economy, the MPC is dedicated to re-establishing the balance between inflation and growth, stated RBI Governor Shaktikanta Das. Since October 2019, banks have tied home loans and other floating-rate retail loans to an external benchmark, which for the majority of banks is the repo rate. The rates on these loans are immediately affected by changes in the repo rate. When the repo rate is lowered, borrowers gain, but when it is raised, they pay more in interest.
Retail inflation in India jumped from 5.5 percent in September to a 14-month high of 6.2 percent in October due to a sharp increase in the cost of food, especially vegetables, pulses, cereals, and edible oils.
According to Shaktikanta Das, “the last mile of disinflation is turning out to be prolonged and arduous for economies.” Given that inflation has surpassed the RBI’s 4 percent target, the MPC appears to have adopted a cautious stance. It attempted to strike a balance between worries about high inflation and slower growth.
In contrast to its position since May 2022, the MPC shifted from “withdrawal of accommodation” to “neutral” in October. Experts anticipate that growing concerns about economic growth make a rate cut likely in the February policy meeting, when inflation is expected to ease. Also, CPI inflation is expected to fall below 5 percent in the fourth quarter, opening the door for a 25 basis point rate reduction.
This year, HDFC Bank raised home loan rates for new borrowers by 40 basis points, even though the repo rate stayed the same. For a home loan of Rs 50 lakh, the lowest interest rate increased from 8.35 percent to 8.75 percent. A smaller 10 basis point increase was also made to the effective new home loan rates by other banks, including State Bank of India (SBI) and Bank of India (BOI).
For a Rs 50-lakh loan, SBI and BOI were offering their lowest home loan rates in April, at 8.4 percent and 8.0 percent, respectively. Beginning in May, the SBI rate rose to 8.5 percent, while the BOI rate rose to 8.4 percent. Experts in finance blame the increase in effective home loan rates on liquidity issues that have affected multiple banks, including HDFC Bank.
Suggested Read: RBI Approved Loan App List
The RBI Governor announced a 50 basis point reduction in the cash reserve ratio (CRR) to 4 percent, which would take effect in two instalments on December 14 and December 28. The percentage of deposits that banks must keep with the central bank is known as CRR. Banks have greater access to funds for lending when the CRR is reduced. Better system liquidity results from this, though deposit interest rates may not rise as a result. Lower interest rates and simpler loan applications for borrowers could benefit economic growth, according to experts.
To lessen their interest burden, borrowers can look into moving to lenders that offer lower interest rates and narrower spreads. To reduce the amount of interest owed, experts advise first-time home loan applicants to choose banks with the narrowest spread.
Some homebuyers, especially in metro areas, may adopt a wait-and-watch approach due to factors like high capital values, inflation pressures, and uncertainty surrounding the RBI’s repo rate cut, point out experts. Meanwhile, housing loan growth is still being driven by Tier 2 and Tier 3 cities, they add.
Advantages for current home loan recipients
In India, the majority of home loans have variable interest rates. Your EMIs won’t likely increase for the time being if the repo rate stays the same. For borrowers on a limited budget, that is good news as banks are probably going to maintain steady lending rates. And this could be a good time to negotiate a better rate if you’re planning to refinance your loan or buy a home, say economists. Now is a good time to review the terms of your loan as this lowers both your principal and the total amount of interest you will pay.
