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Rising Rates After Four Repo Hikes: Turbulent Times Ahead for Home Lending Segment


Four successive repo rate hikes by the Reserve Bank of India (RBI) have pushed up interest rates on home loans to pre-pandemic levels of June 2019.

Now, with interest rates at a three-year high of 8.1-9% across all categories, home loans could begin to slow, after registering a 16.4% increase in outstanding amounts in in the 12 months ending August 2022. This came on top of growth of 11.6% in the prior year period.

According to RBI data, outstanding home loans jumped from Rs 2.51 lakh crore to Rs 17.85 lakh crore in the 12 months ending August 2022 – against an increase of Rs 1 .85 lakh crore to Rs 15.34 lakh crore a year ago.

While the RBI has already increased the repo rate by 190 basis points (bps), from 4% in May 2020, when the pandemic rocked the country, to 5.90%, experts point to indications according to which further increases are in sight, which again hit the setcor. “Further aggressive rate hikes from now could hurt the economic recovery and dampen customer sentiment (in the housing segment),” said Ravi Subramanian, Managing Director and CEO of Shriram Housing Finance. HDFC had raised the retail prime rate by 50 basis points shortly after the RBI’s decision last week, taking mortgage rates to 8.10-9% across all categories.

According to Samantak Das, Chief Economist and Head of Research and REIS, JLL India, the rise in repo rates does not bode well for the real estate sector, especially the residential segment, as it will lead to higher mortgage rates. Since April 2022, when the RBI raised the repo rate by 190 basis points, mortgage rates have increased by an average of 80 basis points and a further rise is in sight in the coming days.

Building on the previous transmission, home loan interest rates are expected to rise in the range of 25 to 30 basis points, JLL said. However, the interest rate after this hike would still be lower than what home buyers had to pay 8-9 years ago, or more than 10%. It is likely that banks could also delay the transmission, given the increase in demand for housing during the holiday season.

“However, if inflation remains at elevated levels, forcing the RBI to aggressively raise interest rates, there could be market turbulence,” said Anuj Puri, Chairman of Anarock Group.

“Anarock’s latest consumer sentiment survey reveals that high inflation had a major impact on the disposable incomes of at least 61% of respondents. The survey also revealed that home sales could be affected to some extent if home loan interest rates cross the 9.5% mark,” he said.

Residential unit sales more than doubled in the first half of 2022, compared to the same period last year, and this growth trajectory continued in the July-September quarter. “With last week’s rise in the repo rate, the revised EMI of home loans would increase by an average of 8-9% compared to six months ago. The continued rise in home loans EMI should therefore act as a disruptor of the We believe that home loan interest rates approaching 9% and above could lead to moderating home sales growth over the medium term, particularly after the current holiday season,” said Das.

The sharp decline in interest rates has been one of the main reasons for the massive surge in housing demand over the past two years. Additionally, the pandemic has reinstated the importance of owning physical assets like real estate. This time around, the recovery in demand has even included previously rent-friendly millennials who continue to be in the housing market, Puri said.

The RBI had cut interest rates from 5.15%, when the pandemic hit, to as low as 4%. Since May of this year, the financial system has once again witnessed a rise in interest rates.

Banks and housing finance companies are now pinning their hopes on the holiday season, when developers typically roll out various offers. Experts say this is when homebuyers will focus on those that directly help contain their overall transaction costs. Experts are also predicting fixed interest rate guarantee plans announced this year.

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