RBI Keeps Repo Rate Unchanged, Maintains Accommodative Stance
Announcing a decision that was widely on the expected lines, the Reserve Bank of India (RBI), on June 4, 2021, left key policy rates unchanged while also maintaining an accommodative stance. All 51 economists in a recent Reuters poll, had voted that the six-member monetary policy committee would maintain a status quo on rates in its June 4 policy meeting statement, while most of the analysts polled by Bloomberg also predicted that the RBI would leave key rates unchanged.
With no change in place, the repo rate, at which the RBI lends money to financial institutions in India, stands at 4 per cent. Similarly, the reverse repo rate, at which the RBI borrows money from banks, stands unchanged at 3.35 per cent.
Recall here that this is the sixth time in a row that the RBI Governor Shaktikanta Das-led MPC has decided to leave the repo rate unchanged. The apex bank had reduced the repo rate by 115 basis points (bps) in 2020 and by 135 bps in 2019 to bring interest rates to record lows.
Quoting Greek philosopher Epictetus, the RBI Governor said the greater the difficulty the more glory in surmounting it, adding that the apex bank would continue to support the economy, which is currently reeling under the impact of the second wave of the Coronavirus pandemic. The Indian economy recorded a negative growth of 7.3% for 2020-21 (FY21), showed data released by the National Statistical Office (NSO) on May 31, 2021.
Based on the adverse impact of the fragmented lockdowns imposed by states to contain the second wave, the RBI has lowered the growth forecast for FY22 to 9.5% from the earlier 10.5%.
RBI Leaves Repo Rate Unchanged At 4%
April 7, 2021: The Reserve Bank of India (RBI) on April 7, 2021, decided to leave the repo rate, at which it lends funds to scheduled banks in India, unchanged at 4%. The unanimous decision of the six-member monetary policy committee, headed by governor Shaktikanta Das, is on widely expected lines as the numbers of coronavirus cases in India see a sharp spike and high inflation levels.
While also keeping the reverse repo rate unchanged at 3.35%, the MPC has also decided to maintain its accommodative monetary stance to help economic recovery. This is for the fifth straight time the apex bank has decided to maintain a status quo on key policy rates. The last change in rates was made in May 2020.
The policy announcement, the first for the fiscal, will prompt lenders in India to continue offering record low home loan interest even though the country’s largest bank SBI increased its home loan rates by 25 basis points to 6.95%
However, the builder community feels some reduction in rates would have been a more positive move as for real estate, the second-biggest employment generating sector in India after agriculture.
"Keeping in mind the resurgence of Covid infections across the country, a slight reduction in the key rates would have been widely celebrated. With the temporary reduction in transaction costs being withdrawn, in states like Maharashtra, the expectation amongst stakeholders of the industry is that the banks should now further sweeten the lending rates, at least till such time that the economy gets back to the pre-COVID levels," said Kaushal Agarwal, chairman, The Guardians Real Estate Advisory.
According to Lincoln Bennet Rodrigues, founder and chairman, Bennet & Bernard Group, residential demand is reviving and this needs to be fostered.
"A further cut in the key rates would have given a boost to current demand uptick that we have seen recently... The International Monetary Fund has projected an impressive 12.5% growth rate for India in 2021, stronger than that of China which augurs well for the real estate sector, too. As the economy is gradually opening up and getting back on track to restore the lost momentum, we feel that special attention should be paid to the sector which contributes significantly to the country's economic growth," he says.
Home Loan Rates To Remain Low As RBI Maintains Status Quo On Repo Rate
February 5, 2021: The current low home loan interest rate regime in India is set to continue, with the RBI deciding to keep the repo rate, at which it lends funds to scheduled banks in the country, unchanged at four per cent. The move by the central bank comes days after finance minister Nirmala Sitharaman presented the Union Budget for 2021-22, announcing several measures to support growth in Asia’s third-largest economy.
In a virtual address to the media, Reserve Bank of India (RBI) Governor Shaktikanta Das said the six-member monetary policy committee had taken a unanimous decision, to maintain status quo on the key lending rate while also continuing with the banking regulator’s accommodative stance. Das, however, indicated that the RBI might go for further reductions in the future, to support the economy, which is currently reeling under the effects of the Coronavirus pandemic.
After lowering the repo rate by a cumulative 115 basis points since March 2020, to counter the pandemic, India’s apex bank has continued to maintain a status quo on its benchmark lending rate since May 22, 2020 - the last time it lowered the repo rate.
“The RBI decision to keep policy rates unchanged is welcome, and signals the government’s focus on fuelling consumption. Given that the economy is well on its path to recovery, the entire focus would now be on how the government plans to boost demand and a lot needs to be done for the sector to improve the pace of growth,” says Surendra Hiranandani, chairman and managing director, House of Hiranandani.
While the RBI's move is on the expected lines, real estate developers, who were largely left disappointed in the Union Budget, said they expected a reduction in rates. “After a budget that had limited announcements for real estate, the sector was hoping against hope for a further reduction in the repo rates. A reduction would have helped to spur demand for real estate assets that have been severely hit, as a result of the pandemic and the subsequent lockdowns,” said Kaushal Agarwal, chairman, The Guardians Real Estate Advisory.
According to a Reuters poll, the RBI may continue to keep rates unchanged till 2023, in order to support the economy. The next meeting of the MPC is scheduled during April 5 to 7, 2021.
RBI Leaves Repo Rate Unchanged Over Inflation Concerns
December 4, 2020: 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