RBI Leaves Repo Rate Unchanged Over Inflation Concerns
Banking regulator RBI, on December 4, 2020, left the key policy rates unchanged, while also maintaining an accommodative stance, in the backdrop of a slowing economic contraction and rising inflation.
The decision after a three-day meet by the six-member monetary policy committee (MPC), was on widely anticipated lines amid the consumer price-based inflation rate in India jumping to 7.61 per cent in October, much above the RBI's comfort zone of 4 per cent, while GDP contracted by 7.5 per cent in the July-September quarter, lower than the central bank’s prediction of 8.6 per cent.
With the decision on November 4, the repo rate and the reverse repo rate remain unchanged at 4 per cent and 3.35 per cent, respectively. This is the third time in a row that the central bank has decided to maintain status quo on policy rates. It last changed the policy rate on May 22, 2020.
“The MPC decided to continue with accommodative stance of the monetary policy as long as necessary, at least till the current financial year and into next year, to revive growth on a durable basis and mitigate the impact of COVID-19, while ensuring that inflation remains within target," RBI governor Shaktikanta Das said, at the virtual announcement of the policy move.
“The recovery in rural demand is expected to strengthen further, while urban demand is also gaining momentum as unlocking spurs activity and employment, especially of labour displaced by COVID-19. These positive impulses are, however, clouded by a possible rise in infections in some parts of the country, prompting some local containment measures. At the same time, the recovery rate has crossed 94 per cent and there is considerable optimism on successes in vaccine trials,” the RBI said in its policy statement.
Even though the RBI may lower the rate only during the April-June quarter now, sector experts are of the opinion that the demand for housing in India will continue to be robust, because of the record low interest rates and various other support measures announced by the banking regulator earlier, to support the country’s second-biggest employment-generating sector.
“The RBI move to maintain status quo on policy rates was expected, in the face of persistently high retail inflation and an already record low repo rate of 4%. Even as signs of recovery appear in Asia’s third-largest economy, the RBI has said that it would be open to cutting rates, if the economy needs support, which is a very positive signal for the future. The earlier measures announced by the RBI, including the rationalisation of risk-weightage norms for home loans, linking it to LTV and restructuring of loans to developers on a project basis, will continue to help the housing sector,” said Dhruv Agarwala, Group CEO, Housing.com, Makaan.com and Proptiger.com.
“Interest rates on home loans are already at sub-7% level, with banks offering further sweeteners, such as processing fee waivers among many others. We hope banks will continue to lend vigorously to the real estate sector, the second-largest employment generating sector in India,” he added.
"If the economy recovers, which is likely after the RBI said it would maintain liquidity in the market and the job market remains vibrant, the affordable housing segment buyer will expedite the process of owning a property. We hope that growth projections improve, leading to a demand boost in the real estate sector," said Pradeep Aggarwal, founder & chairman, Signature Global Group, and chairman, ASSOCHAM National Council on Real Estate, Housing and Urban Development.
"While the apex bank has kept the repo rates unchanged this time, the year in general has witnessed significant measures adopted by the RBI such as rationalization of risk-weightage norms, restructuring of loans based on the projects, linking home loans to LTV which have encouraged buyers to fulfill their dream of engaging in a high-end investment like real estate. At the same time, though a lot of retail banks have now also paced up, passing the benefits to the borrowers, we hope the remaining banks are also as swift in passing on the benefits to customers and continue to adopt a quick disbursal process of funds and loans, keeping real estate as a priority in their lending list, says Amit Modi, president-elect, CREDAI Western UP, and director, ABA CORP.
RBI Maintains Status Quo On Repo Rate
October 9, 2020: The Reserve Bank of India (RBI), on October 9, 2020, decided to leave its key policy rates unchanged as the central bank struggles to create a perfect balance between containing high inflation levels and fuelling economic growth, at a time when it has slipped into its deepest level of recession.
Announcing the decision of the six-member monetary policy committee (MPC), RBI Governor Shaktikanta Das said the repo rate and reverse repo rate remain intact at 4% and 3.35%, respectively. The apex bank has also decided to maintain an accommodative stance.
While the move augurs well for fixed deposit holders, it is an indication that home loan interest rates might not fall any further from this level.
After the RBI, through consecutive cuts, brought the repo rate to its record low level to support growth amid economic uncertainty caused by the Coronavirus spread, almost all leading banks in India have reduced home loan interest rates to sub-7% annual interest. Financial institutions like SBI and ICICI Bank are also offering waivers of processing fee and other associated expenses, to lower the cost of borrowing for homebuyers.
However, these rates are typically for new borrowers. Customers who are already servicing a home loan, are likely to have varying impacts on their EMI payments, depending on the benchmark with which their home loan is linked.
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Repo-rate linked home loans
In case of a borrower whose home loan is linked with the repo rate, the same EMI outgo will continue, as the RBI has hit the pause button on the repo rate reduction. However, in case your lender decided to increase the risk premium, depending on your current monetary condition, the EMI might see a slight increase from its existing level.
MCLR-rate linked home loans
In the same way, no change is likely in your EMI outgo, in case your loan is linked with the previous MCLR (marginal cost of fund-based lending rate) regime. This is because lenders typically have a one-year reset clause in the loan agreement. Under this arrangement, the EMI of a borrower for the year to come are calculated at set intervals, and changes made in the repo rate by the RBI are reflected in your EMI outgo only after that.
Base rate or BPLR-linked home loans
It is highly recommended that those borrowers whose home loans are still linked with the base rate regime or the BPLR regime, should make a switch to the repo rate-linked benchmark. This is because these used to be internal benchmarks, allowing banks greater flexibility to tweak rates as and when it suited them. Under these benchmarks, which were replaced by the MCLR regime in 2016 and then by the repo rate regime in 2019, home loans are still priced at over 10% annual interest.
Current Key Rates
|Date||Repo Rate||Reverse Repo Rate||CRR||SLR|
|Sep 2015||6.75%||5.75%||No Change||No Change|
|Jun 2015||7.25%||6.25%||No Change||No Change|
Source: RBI website