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25 September 2010

Will RBI's repo rate hike impact your loans?

There may be a very marginal increase in rates but nothing to substantially affect finances - by Vijay Pandya - DNA PROPERTY

Whenever the Reserve Bank of India announces a hike in the repo and reverse repo rate, a section of home owners and seek- ers begins to display religious tendencies. In their case, it's not a quest for inner peace or seeking salvation overnight. Even some of the atheists among them send out a heartfelt prayer that the home loan rates of lending institutions and banks should not witness a significant rise. The interest percentage charged on the repayment of a home loan tends to impact home buyers at multiple levels.
For starters it affects their overall budget of expenses. A rise in rates means more funds diverted to home loan repayment and consequently, less money for other expenses. At the same time, it also affects tax planning, investments required and results in repeated consultations with the Chartered Accountant who finalises the tax return before filing it with the authorities.

Key concern areas
The primary area of confusion and resulting concern is whether the RBI repo rate hike will result in a substantial rise in the home loan repayment in the form of Equated Monthly Installments (EMIs)? Well, the good news, according to most industry experts, is the recent RBI announcement should not make a major impact on home loan interest rates or EMIs. If certain institutions or banks do declare a rise in rates, it will be marginal at best with a minimal impact on their customers.

In line with expectations
Mayur Shah, Managing Director, Marathon Group, opines, "It is believed that the RBI has initiated this hike to tame the rising inflation. The increase in rates is also much in lines with industry expectations and therefore it is unlikely to make any major impact on the real estate sector. As far as the property market in Mumbai Metropolitan Region (MMR) is concerned, currently the housing demand is huge as against the limited supply. Looking at the ongoing festivals such as Dassera and Diwali, demand for housing likely to continue without any hitch."

No major impact on loans
Abhisheck Lodha, Managing Director Lodha Group, concurs. "The recent hike in key rates by the RBI is an expected reaction to the prevailing high inflationary environment. However, given the overall liquidity in the system, we don't see it having any major impact on home loan rates or borrowing costs for developers. We expect demand to remain robust in the residential segment over the next few months," he says.

Most lenders may absorb it
According to Pujit Aggarwal, CEO & MD, Orbit Corporation Limited, the repo rate rise is more of a normalizing measure rather than a tightening measure. "Most of the rate rise is expected to be absorbed by financial industry players. As a knee - jerk reaction, some may hesitantly raise home loan rates by 0.25% - 0.50%. Further, an increasing number of bank- ing players want home loan in their portfolio. This may dissuade them from any rate hike. The demand push for homes will keep price levels largely unaffected. However, oversupply in certain areas may bring some moderation in prices. On an overall level, real estate prices expected to inch upward in near to medium term. The RBI announcement is a sign of confidence for the industry with an overall neutral impact," he feels.

Overall sentiments optimistic
According to Nikhil Mansukhani, Di- rector, MAN Infra projects Ltd., "The recent hike by RBI in repo & reverse repo rate will not have any adverse impact on property market. This is because property market currently passing through a bullish phase with demand is higher than the supply. Be- sides, the competitive home loan market has forced the banks to keep interest rates at competitive levels which have provided enough liquidity in the market. The signals from the public sector units (PSUs) as well as private banks post RBI rate hike are also in favour of ultimate interest of home buyers and the banks unlikely to increase home loan rates. Therefore, overall sentiments for real estate sector post RBI rate hike are still optimistic."

Immediate revision not foreseen
Manoj John, Vice President Corporate Planning and Strategy, RNA Corp., feels that RBI's mid-quarter policy review failed to cheer the real estate industry as hike in key rates is likely to lead to higher home loan rates in near future. It is perceived that the RBI has hiked the rates to bring down the inflation and therefore, in long- term effects of    the RBI measures may look positive. The Central Bank raised repo rate by 25 basis points to 6 per cent which has impact on the banks borrowing cost and also acts as a reference point for lending rates. Given that the increase is only by 25 basis points, we do not foresee immediate upward revision of home loan rates by banks and other HFCs."

Inflation control measure
Kaizad Hateria, General Manager, Cor- porate Customer Relations & Sales Residential, Rustomjee, emphasises "The Reserve Bank of India's decision to increase the repo and reverse repo rates by 25 bps and 50 bps is a cautious step taken to contain inflation and at the same time keeping in mind its impact on the productive sectors. While it will certainly boost government's effort in curbing inflationary pressure, the hike is expected to have a marginal effect on lending to developers to some extent. Having said these, we are still awaiting the banks response to RBI's credit policy. The RBI's decision will have a marginal impact on the consumers, who have availed home loans, as the tenure of loans or EMI amounts may go up. While the cost of money for developers as well as customers will go up marginally, its impact would be limited on the prices or the demand for housing. We hope banks will not increase the interest rate on home loan so that growth momentum is given a boost."

Banks have other fund sources
Nishant Agarwal, MD, Avighna India, points out that a very small percentage of bank's funds are obtained from the Reserve Bank - so a weighted average cost of funds is very low. "In time, even if further in- crease in Repo rate eventually result in a 25bp increase in home loans, I will have little or no effect on the luxury home segment as only a small percentage of luxury homes are leveraged. As for middle income housing is concerned, a 25bp increase would theoretically create an anomaly in demand though however in reality, since banks have recently increased the amount of loan percentage per rupee earned for the middle class, I see the demand staying strong with little or no effect."

Genuine buyers will not be impacted

Shobhit Agarwal, Director, Protiviti Consulting Pvt. Ltd., agrees that small adjustments to such rates should not create a noticeable impact on demand for the sec- tor. "Increased borrowing cost tends to de- press the speculative demand at first. Genuine buyers will maintain demand till the borrowing cost is over the 'tipping point' wherein their decision to buy becomes a wait on account of the high debt cost. I do not foresee genuine buyers to be impacted significantly by minor corrections in credit policy. With the economy growing faster and general upbeat mood, demand should be robust, particularly in the festive season," he says.

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