The biggest relief which home loan borrowers got was the much-needed pause in the excruciating rise in home loan interest rates as RBI decided to start holding the repo rate in its MPC meeting in April this year. "RBI’s decision to keep the repo rate steady at 6.5% since February this year will continue to bring in respite for EMI dependent homebuyers," says Vimal Nadar, Head of Research, Colliers India.
The latest status quo is the third consecutive pause in repo rates after a series of hikes that started in May 2022 and lasted until February this year. Though it further consolidates the view that the interest rate hike cycle has nearly ended, however, whether there will be any fall in interest rates in the near future is what borrowers are keenly interested in.
Will there be a fall in interest rates in near future?
The primary responsibility of the RBI has been to keep retail inflation at low levels in the range of 2-6%. The most critical factor that led to the interest rate hike cycle was rising retail inflation due to supply chain disruption caused by the Russia-Ukraine war. The very month of May 2022 in which RBI went for the first repo rate hike of this current cycle, witnessed the peak of retail inflation of 7.79%. Aggressive repo rate hikes helped RBI to bring inflation below 5% for the first time in April 2023 and as a result, it was comfortable in pausing the interest rate hikes.
"Differing from the U.S.A and European Central Banks, the RBI chooses to keep the Repo rate unchanged. This strategy is preferred to manage inflation and ease pressure on homebuyers," says Mohit Jain, Managing Director, Krisumi Corporation.
However, after falling to a record low of 4.31% in May, the retail inflation has shot up to 4.81% in June this year. With continued pressure on prices, especially in food items, the inflation number for July could go up further.
"The central bank remains watchful on inflationary expectations and is focused on bringing the inflation level to its 4% target. Measures to reduce excess liquidity, with temporary tightening through incremental Cash Reserve Ratio at 10%, aligns with price stability goals of the central bank. Maintaining policy rates will bolster consumer demand amid moderate inflation, further promoting economic growth," says Shishir Baijal, Chairman & Managing Director, Knight Frank India.
The future direction of inflation will be the biggest factor that will determine the direction of interest rates. WTI crude oil prices which had gone up to a peak of $123 per barrel in June 2022 have come down to below $75 per barrel in June 2023, but it has shot up again to $84 per barrel now. The wholesale price index has fallen to negative territory almost after 3 years when it registered an inflation of -0.79% in April 2023. It has gone down further to -3.48% in May and -4.12% in June this year. The 10-year G-sec yield, which is a good indicator of future expectations of interest rate movement, has already fallen from the peak of 7.459% on March 8, 2023 to 6.983% on June 7, 2023, but it has risen since then to 7.17% on August 8.
All these factors indicate that while the possibility of an interest rate hike in the near future is very low, however, a fall may also not be coming soon. "The upward revision in the expected level of inflation to 5.4 percent for the full year by RBI, indicates the continued vigil which is required to keep a check on inflationary trends. The target of 4% inflation is still far off and therefore there is no likelihood of any reduction in the repo rate soon," says Jyoti Prakash Gadia, Managing Director at Resurgent India.
When will home loan borrowers see a fall in interest rates?
The fear of recession in the US and in many European countries cannot be ruled out completely. Many advanced economies are facing a tough time to have economic growth, while some have faced recession, many others are confronted with very low economic growth. Unless there is a significant pickup in the overall demand in these economies, inflation may get back to very low levels soon. The reduction of interest rates is a step that many central banks may resort to sooner or later to revive growth.
"There is an emerging expectation that the RBI might eventually consider a reduction in key interest rates. Once this happens it will be a much-needed breather on EMIs for home loans," says Ashwin Chadha, CEO, India Sotheby's International Realty.
Many experts see the year-end 2023 or year beginning of 2024 as a period when interest rate reductions may start globally. So, if there is a durable sign of inflation subsiding, the RBI may follow also follow suit.
What should borrowers do?
If you are a home loan borrower, there is hardly anything you can do about the interest rate movement but at least you can ensure that you are getting the best possible deal on your home loan. As interest rates have peaked, most borrowers will be paying the highest interest rates seen in the last three years on their EMIs.
"Amidst the rising cost of these properties and the cumulative 250 bps rate hikes by the RBI in the last one year and more, affordable housing buyers have taken the severest blow. As per ANAROCK Research, homebuyers’ EMIs jumped up by 20% in the last two years. Home loan borrowers who were paying an EMI of approx. INR 22,700 in July 2021 are now paying approx. INR 27,300 - an increase of approx. INR 4,600 per month," says Anuj Puri, Chairman - ANAROCK Group.
"This 20% increase in the EMI has resulted in a jump of approx. INR 11 lakh in the overall interest component - from approx. INR 24.5 lakh interest payable in 2021 to approx. INR 35.5 lakh today. The total interest payable over a 20-year tenure is now more than the principal amount," adds Puri.
However a prolonged pause is in the series of hike is a relief for borrowers. "A steady repo rate implies stability in the interest rates offered by banks. Home buyers who have taken loans or are planning to take loans for purchasing property can benefit from the unchanged repo rate as it may lead to consistent or slightly lower borrowing costs," says Adhil Shetty, CEO, Bankbazaar.com.
If you are an old borrower, servicing a loan under previous regimes like the MCLR or base rate, then it may be a good time for you to shift to the new EBLR regime. This is because when there is a fall in interest rates, you will quickly benefit from it.
"For home loan borrowers, fixed-rate loans may be available in the market at some discount compared to floating-rate loans. However, since rate cuts are expected in the foreseeable future, it is better to continue with floating interest rate loans for now," says Anshul Gupta, Co-Founder and Chief Investment Officer, Wint Wealth.
You must compare your interest rate with other lenders and if you find that they are offering a much lower interest rate to a new borrower, then you may transfer your loan after calculating the net benefit. However, if your lender is giving a much lower rate to new borrowers, then you may request your lender to re-price your loan at a lower rate. They usually charge a repricing fee and restructure your loan at the new rate.
If your affordability has gone up after getting a salary rise, then you may consider increasing your EMI so that your total interest outgo could be brought down. If you are getting a bonus or incentive, then you may consider going for partial prepayment so that your home loan outstanding comes down which will help you reduce the tenure and total interest outgo of the loan.
