In anticipation of the upcoming RBI Monetary Policy Committee (MPC) meetings, where the possibility of a repo rate cut will be under consideration, Kanika Singh, Chief Risk Officer at India Mortgage Guarantee Corporation (IMGC), discusses the key factors that could influence the governor's decision.
Speaking with Business Today’s Navneet Dubey, Singh examines how inflation and economic growth dynamics might shape RBI’s policy stance. She also highlights the potential effects of rate adjustments on home loan demand, affordability, and the broader real estate market, offering practical insights for borrowers looking at potential changes in loan structuring amid these possible rate shifts.
BT: Given the current economic conditions and RBI's stance, what is your assessment of the likelihood of a repo rate cut in the upcoming MPC meetings? What factors do you believe will be most influential in the RBI's decision-making process regarding interest rates?
KS: In the latest MPC, RBI maintained the repo rate at 6.5% but changed their stance to “neutral”. Markets anticipate at least a 25 bps rate cut in December MPC. However, given the sharp increase in headline inflation (reported at 5.5%) and the RBI Governor's most recent statement on looming inflationary risks, it is unlikely that there will be any change to the current repo rate in December. Further, India's growth projections remain robust and are expected to record 7.2% for FY25. Factors that will weigh in on RBI’s decision in the near term include inflation outlook, growth and overall macroeconomic stability. Further, with the induction of the 3 new members in MPC, there might be some possible change in stance given the concerns around loss of growth momentum.
BT: How do you expect a repo rate cut to impact home loan demand and affordability? What are the current trends in home loan demand, especially in the affordable housing segment? How has the festive season typically impacted demand in the past? How might this impact homebuyers and developers in this space?
KS: There will be a positive impact for sure as affordability has become a challenge with loans continuing to be expensive and the average ticket size of properties steadily going up over the last few years.
India's housing market has shown signs of moderation with all segments like high-end, mid end and affordable largely remaining flat q-o-q. The Real Estate sector does peak during the festive season, however, factors like high capital value, inflation pressures and uncertain timelines around RBI’s repo rate cut might lead some homebuyers to adopt a wait-and-watch approach for now.
BT: How will a repo rate cut impact existing borrowers of home loans? What specific benefits can new and existing home loan borrowers expect from a repo rate cut? Will there be opportunities for refinancing or prepaying loans?
KS: As and when RBI cuts the repo rate, existing borrowers of home loans can expect a reduction in their prevailing rate of interest. Borrowers will see benefits either through lower EMIs or reduced loan tenors. Since the cost of funds is likely to come down whenever the monetary policy easing starts, Financial Institutions (FIs) could offer new loans at attractive / lower interest rates. Existing borrowers can use the opportunity to transfer their loans to FIs offering these rates and get the benefit of lower EMI outflow.
BT: In light of potential rate cuts, should borrowers opt for fixed or floating-rate loans? What factors should they consider when making this decision?
KS: It is advisable for borrowers to go in for floating-rate loans especially if we get into a declining interest rate cycle. Borrowers should assess their capacity to service their obligations by stressing their ROI e.g. if the FI is offering a rate of 8%, then borrowers should do a simulation to see their outflow if the interest rate swings +/- 2%.
BT: What strategies would you recommend to borrowers to maximize their benefits from a potential repo rate cut?
KS: Borrowers can do a balance transfer of their Home Loan to FIs who are offering reduced interest rates. If affordability is not a challenge for the borrowers, then they can continue with the same EMI outflow but with faster loan maturity.