The RBI has increased repo rate by 50 bps, the third consecutive rate hike in the last two months, thus signaling an end to the all-time low-interest rates regime. While the move was taken up as a pertinent measure to curb rising inflation, it has created ripples of apprehension in the real estate industry. This development has come at a time when the industry was just about coming out of the COVID-19 crisis, finding its footing after a prolonged spell of market gloom. The current situation, marked by global headwinds from geopolitical conditions impacting the supply chain ecosystem, and the rising cost of construction raw materials, already portend an uneasy road ahead for the industry.
The housing market is expected to bear the major brunt of the repo rate increase. The residential market had picked up substantial momentum in the past 18 months, with the first half of the year 2022 seeing sales recorded at around 1.6 lakh units, buoyed largely by the RBI’s stand of keeping repo rates unchanged. Majority of the new residential launches and sales during the pandemic period was observed in the affordable and mid-segment budget categories. With home loan EMIs set to increase in tandem with the repo rate increase, prospective buyers might be compelled to reconsider their buying decisions. Additionally, the rising cost of construction would induce developers to increase the price of their products, further impacting home buyers and leading market sentiments to somewhat decline in due course.
On the other hand, while real estate market faces an imminent trickle-down effect of the repo rate, it is equally important that the economy continues to grow in a stable and inclusive manner. This increase is a critical step towards controlling liquidity circulation in the economy, which, in the medium term, would expectedly lead to relative stability, provided that the current uncertainty arising out of geopolitical situation subsides.
In the forthcoming months, we expect the impact of the repo rate increase to be evident in residential sales number, particularly in the affordable and mid-segment budget categories, and amongst first time home buyers who rely mostly on home loans. The constraint in the real estate market notwithstanding, the RBI’s decision to raise the repo rate has been a prudent move, given that strict fiscal measures are being adopted by central banks world over to combat rising global inflation levels. We believe that this crucial step will aid in restraining inflation levels and bring forth steady growth in the medium term. With such stringent measures implemented, we expect inflation to reduce by the year-end, which might encourage the central bank to lower interest rates. This is important as increased interest rate not only impacts the real estate market but also affects the cost of doing business. Hence, we anticipate the increase in repo rate to be a temporary, inflation-curbing exercise that would eventually strengthen the economy and allow the real estate industry to function in a conducive environment in the coming future.
