RBI MPC’s Decision to Retain Interest Rates: Impact on Real Estate

RBI’s move to keep the repo rate unchanged at 6.5% was more or less expected, but it is imperative.

Updated on: 30 January 2019 7:39 pm

December 5 2018, New Delhi: The decision of Reserve Bank of India’s Monetary Policy Committee (MPC) to retain the same interest rates comes as a relief for the real estate sector.

“The decision on keeping the key policy rates unchanged … will be a relief for the real estate sector that has been worrying over a possible rate hike adversely impacting the market. We believe the easing inflation situation and the need to actively support growth are the primary consideration for the MPC to maintain a status quo on rates,’’ said Shishir Baijal, Chairperson and MD, Knight Frank India.

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Industry experts point that politically, an upward revision would not have served the current Government well as the 2019 elections are around the corner. They also highlighted that from an economic standpoint, a hike in repo rates would have had a direct impact on home loan rates.

“High housing loan interest rates are known as deterrents to many buyers, especially in the affordable segment where higher interest rates can and do weaken sentiments,” said Anuj Puri, Chairperson, ANAROCK Property Consultants.

He adds that any move to further discourage customers from availing of bank credit would ultimate exacerbate the liquidity crunch and adversely impact the economy. “From that perspective, the unchanged repo rate will at least keep the demand for housing loans at status quo,” he said.

RBI’s move to keep the repo rate unchanged at 6.5% was more or less expected, but it is imperative that the central bank maintains an adequate buffer for the economy as the industry expects a major change in the next few months in the sector through real estate investment trust and special purpose vehicle. The Real Estate Investment Trusts (REITs) are an eligible financial instrument, developed under the Foreign Exchange Management Act (FEMA) 1999.

The intent of introducing REITs is to reduce pressure on the banking system to which the real estate sector depends for funds, free up existing funds of banks and to encourage construction activities. REITs while attracting long-term finance from foreign and domestic sources including NRIs would make available fresh equity to the sector