Home loans will become expensive, consumer demand will moderate

Today’s rate hike follows a 40 basis point hike in early May at an unscheduled meeting that kicked off the central bank’s tightening cycle, which economists expect to be relatively short | Image by InspiredImages from Pixabay

The Reserve Bank of India’s key rate was raised by 50 basis points. It was the second hike in as many months, in an attempt to calm still-high inflation. The Monetary Policy Committee (MPC) raised the key rate or repo rate by 50 basis points (bp) to 4.90%.

The standing deposit facility rate and the marginal standing facility rate were adjusted upward by the same amount to 4.65% and 5.15%, respectively.

Today’s rate hike follows a 40 basis point hike in early May at an unscheduled meeting that kicked off the central bank’s tightening cycle, which economists expect to be relatively short. “Upside risks to inflation, as highlighted in recent policy meetings, have materialized earlier than expected,” Governor Shaktikanta Das said after the policy decision.

What do rising rates mean for consumers?

The rate hike will drive up mortgage interest rates, which had already started to climb after the surprise monetary policy announcement last month. Interest rates will remain lower than during the global financial crisis of 2008, when they reached 12% and more. Nevertheless, the current increase will be reflected in residential sales volumes over the next few months, more so in the affordable and intermediate segments.

The recent off-cycle rally has had an impact on the housing sector, which had begun to recover after two years of calm, and this rise will weigh on buyer sentiment.

Anuj Puri, Chairman of Anarock, said: “The silver lining is that the Indian housing market is still largely end-user driven, so there is no mentality of investor looking for the lowest possible entry point. The real demand comes from an underlying yearning for home ownership.

A repo rate hike of 50 basis points was imminent given the current inflationary trajectory and geopolitical concerns. Shishir Baijal, President and Managing Director of Knight Frank India, said, “From a real estate perspective, home loans are expected to become more expensive. Banks have already raised the interest rate on home loans by 30 to 40 basis points since the previous repo rate hike by the RBI in May and now, with the repo rate cumulatively higher by 90 basis points , there will be a further increase in the interest rate for home buyers. Rising interest rates along with high home construction costs and commodity price pressures could negatively impact home buyer sentiment.

The manufacturing sector will see a decline in figures

The manufacturing sector will also see lower numbers as retail purse strings tighten. An impact on the stock market is also inevitable, said Anjana Potti, Partner, J Sagar Associates (JSA). In May, after the surprise rise, markets also saw a sharp fall with the BSE falling over 1,400 points and the NSE settling below 16,700, registering a fall of 391 points, leaving investors poorer by almost 6.27 lakh crores. However, hopefully investors are better prepared for the upside this time around.

Higher rates are expected to dampen consumer demand, which may prevent higher producer prices from being passed on to customers in the future. However, it could reduce profits for companies in the immediate term as they grapple with higher input prices and weak demand from their consumers, said Rajiv Shastri, director and CEO of NJ AMC. Fiscal initiatives by the government may be needed to offset the decline in private consumption and maintain GDP growth at expected levels, which could lead to increased government borrowing in the near term.

Interest on FD, government bonds will drop

The further increase in the pension rate to 4.9% to fight against inflation will lead to huge investments in the real estate sector. Sophisticated investors will now stay away from fixed income investments such as FDs and government bonds which are losing due to inflation.

Food inflation could fall

Inflation has been above the RBI’s target range of 2-6% since the start of the year. With the ongoing war in Ukraine and COVID issues in China, supply chain disruptions continue to affect global inflation. The RBI has revised inflation for FY23 to 6.7% so inflation will continue to hurt consumers’ pockets and business results for the coming quarters, said Raghvendra Nath, Managing Director of Ladderup Wealth Management Private Ltd..“We could see food inflation ease if the expectation of a normal monsoon this season proves true. The CRR was expected to be raised, but it appears that RBI has decided to maintain liquidity with the banks for the time being.

Rents on commercial real estate will increase

For those held back by falling interest on fixed deposits, government yields, the smart move at this point will be to diversify their portfolio into higher yielding assets like commercial real estate. Kenish Shah, co-founder of PropReturn, said: “As seen earlier, rental yields in commercial real estate will rise due to the sudden rise in interest rates and become a powerful tool for wealth creation. for many investors. Rising interest rates are a boon for the real estate sector.

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